A couple of years ago, upon receiving his monthly brokerage statement, my oldest son accosted me with the following question: “why would anyone want to invest in the stock market”?
What followed was one of the more colorful debates of my career. I always sensed his query to be more an accusation of sorts. Nonetheless, the topic at hand is the answer to his well put question.
Wealth is created via ownership of productive assets. Possibly the easiest most straightforward path involves the passive strategy of investing in publicly traded stocks. Passive because the owner of such asset is not responsible for collecting rent, hiring/firing, etc. Over time the stock price (a.k.a. value) is based upon the earnings that the target company has achieved plus its forecasted profits. Not many factors play as big a role in these future profits as does technological innovation.
Here is where it gets interesting, in my opinion. I ask, “do you think the iPhone 10 or Snapchat were the last advancements in personal communication technology? How about the MRI being the last innovation in the medical device arena or the Seqway in motorized travel?” Elementary school children can answer the first round of questioning. You see, technological innovation moves on an exponential scale which means that whereas one new breakthrough once gave rise to 3 others, today new technology in the same field can give rise to 10 others (Technology Feels Like It’s Accelerating Because It Actually Is, SingularityHub.com 3/22/2016). Consider that the first computers were designed on paper and put together by humans but today they’re designed on computers via Artificial Intelligence anticipating the next round of enhancements then assembled by robots with little human involvement.
Admittedly, the above is a very simple way to describe the process that, as I put it, will drive the stock market higher as long as we have industrialized civilization. This won’t happen on a straight line of course and maybe we are long past due for another so-called “correction”. There are plenty of big swings down as human get those profit forecasts wrong! The leaders of technology today say that the advancements in the next 10 years will dwarf the last 10 (Forbes.com, Here Are the Top 10 Breakthroughs For 2018, February 2018). No question for me that I will want to be invested to participate in that move.
You know, living past 100 with a full head of hair is fine but I’m not about to give up my 8 track tapes.