Investing Truth No. 8: Good news! Historically markets have risen over 2/3 of the time

By Mike Jones, posted June 19th, 2014

Most people think of investing as a personal activity that directly impacts their individual future.  However, most of what we are taught is really only applicable to investors en masse, i.e. the market-at-large, and over large periods of time.  Over the next several months I will share 10 points that I believe every investor should know prior to committing funds to any investment program.

Did you know that, since 1926, the annual return of the S&P 500 has risen 63 out of 87 years?

"In the short run, the stock market is like a voting machine, tallying up which firms are popular and unpopular, but in the long run, the stock market is like a weighing machine, assessing the substance of companies." So said the father of value investing, Benjamin Graham.*

Graham wholeheartedly believed in investing in the stock market. His life history proves it. And although he and David Dodd literally wrote the books on value investing and security analysis--aptly named Security Analysis--he also understood volatility comes with the territory. 

Investing in stocks is a leap of faith: faith in capitalism; faith in ingenuity; faith in innovation.

Investing is one way we human beings can reach into the future and own the sum total of services, sales, and profits of Corporate America at a discount. For example, in 1960 the earnings (after tax profit) on the S&P 500 was $3.10 and you could invest in the index at a price of $58.11.  In other words, you put up $58.11 and got $3.10 in earnings each year. That's about 5%.

By the end of last year (2013) the earnings on the S&P 500 were $107.45**... approximately twice the price you paid back in 1960 just in annual profits.  How about that?

That would be comparable to paying $58.11 to buy a share of Company X in 1960. By 2013, the earnings you get each year off Company X are $107.45. Pretty amazing.

Needless to say as profits grew the value of the stock market grew.  That explains very well the weighing machine comment above. 

But what about Graham's voting machine/ popularity contest comments? Just take a look at the chart below. 

This chart covers the years over which the earnings grew from $3.10 to $107.45.  Over those 53 years any time something occurred in the world which made investors less optimistic about the future of their stock market profits, the voters cast their ballots with sell orders. Be it the Vietnam War, Watergate, the "Oil Embargo," Desert Storm or simply a bonafide recession: any real event that temporarily threatened the future of growth and prosperity, stocks sold off.

But, the fact remains that there have been many more up years than down. And these up years have overwhelmed the down years!

Where will we be in 53 years?  I--and no one else--can answer that, but I do hope I am around to see it... I would be 108 years old then!  Still, looking back at history, I for one am willing to risk my capital that earnings on the S&P 500 will likely be much greater than $107.45.  

^{Source: *Morningstar, **Bloomberg}

Mike Jones is Managing Director / Investing Group of Argent Advisors, Inc. Email him at mjones@argentadvisors.com. Write to him at 500 East Reynolds Drive, Ruston, LA 71270 or call him at (318) 251-5844. The opinions of any single advisor do not necessarily reflect the opinions of Argent Advisors, Inc.  No forecasts can be guaranteed.  Argent Advisors, Inc. does not offer tax, insurance or legal advice.  The information contained in this column should not be construed as a substitute for personalized investment, tax, insurance or legal advice.