What got you interested in or started investing in the stock market? If you had never invested in risky assets before you started investing in stocks, you had a strong motivation and rationale for doing so.
In my case, the trigger was a single diagram. I still vividly remember the moment I saw this diagram, I felt a massive release of substances in my brain that caused my blood to rush to the surface. It was a shocking event that cannot be described in half-hearted, clichéd terms such as “out of the blue” or “scales falling from my eyes”. I also resented the world a little bit, wondering why no one had taught me something so important earlier.
When I was in my late teens, my hobby was reading philosophy books, and since I majored in physics at university, I was rather fond of thinking abstractly, and I thought I knew a little bit about the “truth of the world” and the “essence” of the world, which I had extracted by cutting out information. However, when I saw this diagram, I felt ashamed of myself for not knowing (or overlooking) what an important thing I had been doing in my life.
The reason I started writing this blog is to let as many people as possible know the facts that this one diagram tells us about. In terms of probabilistic expectations, we can even say that we will be richer from those who know this information and act appropriately. Moreover, the sooner you know it, the better.
In this article, I will detail a single diagram that depicts what is more important than anything else in this capitalist society, let alone investing in stocks.
A picture of the essence of stock investment
SOURCE：AAII Journal
Here’s a diagram of the most important “treasure map for building wealth” I’ve ever seen.
Isn’t it beautiful? This chart shows the evolution of the value of U.S. market stocks, bonds, the U.S. dollar, and gold in dollar terms over 200 years and was written by Dr. Jeremy Siegel, who is no stranger to foreign stock investors.
Stocks is a U.S. equity index, but it represents the entire U.S. equity market.
Real total return is the value of dividends and interest on stocks and bonds, adjusted for (minus) inflation, under the condition that they are reinvested in the same asset class. In other words, it represents the actual purchasing power of dollar bills, minus the dilution of their value as prices rise.
With regard to U.S. dollar inflation, the chart shows that it began around 1940, and especially after the Nixon shock in 1971, when the gold standard came to an end, the real value (purchasing power) of the U.S. dollar depreciated to the right as the rate of inflation increased.
So, without the current backing of gold, legal tender has the propensity to depreciate in value if you just deposit it.
It is important to note that this diagram is a logarithmic graph with the vertical axis being the logarithmic axis. Logarithmic graphs are graphs that increase by a constant factor for each memory. In the case of the above chart, when the vertical axis increases by 1 memory, the asset value increases by 10 times.
Now then, please take a look at the U.S. Equity Index, shown by the blue line. The essence of investing in stocks is the exponential price movement of stocks, which is right up in real terms.
The red line is the line that represents a 6.7% annual real return. You can see the blue line going back and forth across this line, constantly moving rightward. This means that the value of the U.S. stock market has risen rapidly (boom) and fallen sharply (recession) while growing in value at a rate of 6.7% in real purchasing power over the long run for over 200 years.
As for compound interest, if we use the Rule of 72, which represents the period of time (years) over which 72 divided by the annual return doubles, we get 72 divided by 6.7 ≈ 10.75, which is roughly the pace of value doubling in 11 years. That’s 930,000 times the value in 212 years for the period in this figure!
However, it’s important to note that you can lose in the short term. If you buy at the worst possible time, you should be prepared for a latency period of up to 15 years, even if it’s short term. However, with investment terms of 20 years or more (dividend reinvestment), the U.S. stock market is literally a no-lose proposition.
Siegel’s research also shows that long-term investments over 20 years are less risky than bonds. In other words, what we can say from the past 200 years of research is that if you buy and hold a U.S. equity index for 20 years or more, you have had less risk and greater returns than bonds.
Nevertheless, it should be noted that a once-in-a-century Lehman Shock-class depression would cause the U.S. equity index to temporarily decline by up to 1/3 of its value in yen terms (i.e., 2/3 of a decline) due to the strong yen. It is worth noting that even if such a decline occurs, the chart shows that the U.S. stock market has the resilience to rebound if we wait a few years.
Stock investments have this timing risk, but this timing risk can be avoided to some extent by diversifying the timing of purchases. One way to do this is to buy more stocks on a regular basis using dollar cost averaging.
My strategy is to use dollar cost averaging and buy ETFs such as VOO on a regular basis to get a 6.7% real return on the red line without being at the mercy of market swings. This is because I understand that no matter whether the market goes up or down, buying inorganically, mechanically, unthinkingly and honestly like a machine is a highly reproducible and rational method.
Summary
For me, the biggest baseline for betting on stock investments is the single figure mentioned above. The only other information that is important to me is Piketty’s “r>g”. Ultimately, if you know these two essentials, the rest of the information can even seem like the end of the branch. These two pieces of information are like “Newton’s equations of motion” and “Einstein’s theory of relativity” in physics.
Investing in the U.S. stock market has dominated other asset classes for the past 200 years. And if you own it for 20 years or more with dividend reinvestment, it has always been positive in real returns (no matter when you buy it). The exponential right-handedness of a long-term investment is the essence of stock investment, and thus of capitalist society, hidden in this figure.
For a more detailed explanation, please read Mr. Siegel’s book “Stocks for the long run”.
コメント