Why Stocks…

The biggest reason to own stocks (dividend-paying or not), is that their value tends to move in-line with the fortune the economy. If the economy performs well, stocks usually perform well, though stocks tend to lead the economy itself in their performance. The way most people value stocks is based on expectations of the future profits of a company. If people believe that a company will do well in the future, they will purchase stock in that company. Whether the company actually performs as expected is immaterial. Stocks go up when people believe in the future good-fortune of a company.

People believe in the likely good-fortune of companies for all kinds of reasons. Sometimes a particular company will far outperform others because of a trendy market niche or product. Stock pickers believe they can identify these companies that are likely to outperform others. They are often wrong. On average, people who pick stocks underperform the broad market.

If one acquiesces to the fact that they are unlikely to be able to pick stocks that outperform the broad market, it suggests that one should pay more attention to what drives the stock market (the economy) than the particulars of individual stocks. When the economy is good, the great majority of companies do well and when the economy does poorly, most of those same companies struggle. It has been much more important to buy stocks on the way into an improving economy and to sell just before the economy falters than it has been to pick the “right” stock. But just as choosing individual stocks is fraught, so is knowing when the market is at a top or a bottom.

Despite the problems of knowing what to buy and when to buy (and sell), stocks that reflect the buying habits of individuals are likely to appreciate in the very long term if for no other reason than it’s likely that the population will grow. But corporate success is by no means assured and one shouldn’t get sucked into believing that stocks will perform well in the future because they have performed well in the past.

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