Why We Own Stocks
“Because profits go up 8% a year, and stocks will follow. That’s all there is to it.” -Peter Lynch
The latest tug of war in the financial punditry is between the “recession camp” and the “soft-landing camp”.
In the recession camp we have consumers and corporations lowering their plans to spend and invest as financial conditions tighten and covid-era fiscal and monetary stimulus recede from the economy. In the soft-landing camp, we have inflation rapidly falling and an eventual “Fed pause” on interest rate hikes that will result in more manageable financial conditions for consumers and corporations.
There are plenty of reasons to be concerned about the fate of the U.S. and global economy in 2023 and beyond. As much as we enjoy the debate about where economic growth may be heading, our discipline – when we are allocating to equity risk in a portfolio, rather than meeting short-term cash needs – is to buy and own great businesses.
Great businesses tend to become even better businesses when the going gets tough, and long-term shareholders are rewarded for their patience – not their ability to forecast fluctuations and volatility in the economy.
In 1994, famed investor Peter Lynch gave a speech to the National Press Club and was asked if he was concerned about volatility in the market. Whether it’s 1994 or 2023, volatility is a fact of life for investors. Lynch’s response is a perfect articulation of why we own stocks, despite the volatility:
“Basic corporate profits have grown about 8% a year historically. So, corporate profits double about every nine years. The stock market ought to double about every nine years. So I think — the market is about 3,800 today, or 3,700 — I’m pretty convinced the next 3,800 points will be up; it won’t be down. The next 500 points, the next 600 points — I don’t know which way they’ll go. So, the market ought to double in the next eight or nine years. They’ll double again in eight or nine years after that. Because profits go up 8% a year, and stocks will follow. That’s all there is to it.”
Whether it’s supply chain constraints, labor shortages, rising interest rates, or geopolitical instability, great businesses find ways to navigate these challenges and create value for their customers and stakeholders. That value creation shows up in rising corporate profits over time, and stock prices eventually follow. That’s all there is to it!
Hat tip to Sam Ro at TKer.co for the inspiration to watch Peter Lynch’s 1994 address to the National Press Club.
Peak Asset Management, LLC is an SEC registered investment adviser. This is not an offer to buy or sell securities. Past performance is not indicative of current or future performance and is not a guarantee. The purpose of this content is solely informational and does not constitute investment and/or tax advice. The information set forth herein was obtained from sources which we believe to be reliable, but we do not guarantee its accuracy.
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