After stomaching 3 years of stock marketlosses, the average physician-investorhas no doubt heard the phrase,"Wait it out," from their financial advisor.And like an ice cream sundae without acherry, this reassurance is usually toppedwith, "The market always goes up, onaverage," or, "Since the early 1900s, thestock market has gone up about 10% peryear, on average." A barrage of colorfulgraphs and charts usually follows thesestatements. But despite the attempts toalleviate your fears, your stomach stillchurns when you receive your portfoliostatement or turn on CNBC.
Sound familiar? Unfortunately, comfortingwords are sometimes not enoughto appease an investor with a vivid imagination.However, in this case, your advisor'sreassurance should be taken toheart. They are telling you the truth.More important, there is a reason whythese statistics and graphs have withstoodthe test of time. And it is my beliefthat if more investors would understandwhy they continue to hold true, thenfundamental investor confidence in ournation's economy and the stock marketwould improve greatly.
THE MARKET BROKEN DOWN
So, let's review some financial factsbefore we begin exploring the why's ofour country's strong economic tradition.First, investors need to realize that theUS economy and the stock market arenot the same thing, and that bothbehave differently. On its most basiclevel, the stock market is a derivative ofthe US economy; however, the stockmarket and the economy do not movehand-in-hand in the short run.
Do you remember back in the late1990s when technology seemed to makeits grand entrance onto the market'sstage? Do you believe this tech stockboom was justified? The view fromtoday's market window into the pastprovides quite an absolute answer: No.On the other hand, can we honestly saythat the bust mentality of today is justified? No, we can't. A boom or a bust in acertain sector of the economy (eg, technology)will often drag up or drag downthe rest of the market, whether the marketdeserves it or not.
The best investment minds of ourtime often describe the stock market as awild beast—a creature whose state ofmind, either positive or negative, usuallyhas no relation to reality. Maybe youknow an actual person who resemblesthis depiction, someone whose life islived according to their own sense ofreality, not the real world the rest of uswake up to every day. Hopefully youdon't, because dealing with a person likethat can prove beyond challengingsometimes. But that's the market: abeast in its own world, whose moodand behavior is influenced by its owndetached reality.
However, despite the fact that theeconomy and the market behave differently,it is true that over the long run(and that's the key), the stock marketand the economy move in the samedirection. Why is this the case? This happensbecause corporate profits, resultingin investor dividends, are eitherstrong or weak, and, as a result, theprice of the corporation's ownership, inanticipation of those dividends, is effectivelyeither high or low.
THE PAST AS THE FUTURE
Now that the relationship betweenthe US economy and the stock markethas been defined, let's see if a commonsenseapproach to the long-term directionof the economy can be fashioned.More importantly, let's look at the reasonsfor the continued prosperity of theUnited States. I have put together a listof 5 items, which I credit for a century ofsteady stock market growth and economicprosperity. If this list holds truetomorrow, there is no reason to be along-term bear:
1. Taxes. Compared to the rest of theworld, the United States has some of thelowest taxes. A dramatic increase intaxes would give reason to believe thatlong-term growth may be stifled.
2. Freedom. This follows hand-in-handwith taxes. We, as Americans, arethe most politically free people in theworld. With this freedom comes theopportunity to start a business, receiverevenues, retain a profit, reinvest, grow,and reward shareholders.
3. Peace. Even though we are in themidst of increased international tensionsand a looming confrontation with Iraq,the United States is still a nation at relativepeace because of the unmatchedstrength of our military. If our armedservices were decimated by drastic budgetcuts and unable to defend us, ourcorporations' confidence to invest wouldbe greatly hampered.
4. Debt control. Even though debthawks and political opportunists willpoint out the nominal size of our nationaldebt at the drop of a hat, they fail totell the public of its size relative to USeconomic output, or on a per capita basis.For example, Canada's national debt istwice as high as ours on a per capita basis.
5. Government's attitude. If ourgovernment was not accountable to thepeople and unwilling to cut taxes andremove restrictions on trade to strengthenour economy, then maybe it would betime to get out of the market.
Given this list, I invite you to sit backand take stock of the world in which youlive. Are you free? More specifically, areyou free to be an entrepreneur? Areyour taxes lower than your Europeancounterparts? As an American citizen, doyou feel less threatened than an Israelior Palestinian citizen? Do you doubt therobustness of our economy and its abilityto control and service this debt? Doour current government leaders seemunwilling to try to remedy the economicproblems in front of us?
That's a barrage of questions, I know.But it's important to take stock of theworld in which you live every now andthen to ensure you're seeing the big picture.In this case, if you can honestlyanswer "no" to any of these questions,then you should do 3 things: continue toquestion the ability of our nation's economyto grow over the long term, rethinkthe sustainability of positive returns ofthe stock market, and sell. However, ifyou can answer "yes" to all of the questions,the next time your advisor tells youto "wait it out," smile and take theiradvice to heart.
James Douglas Mattern always
welcomes questions or
comments and can be reached
via e-mail at firstname.lastname@example.org.