3 reasons investment markets go up | Pete Wargent

I never attempt to make money on the markets. I buy on the assumption that they could close the market the next day and not reopen it for five years.” – Warren Buffett

Share markets and property markets may appear to move upwards and downwards in a seemingly random manner.
That’s because we tend to view them through a microscope (short term) rather than through a telescope (long term).
Take a look at markets over the longer term, though, and you will see that both in Australia and overseas the trend is the same: upwards.
In fact what happens is that markets tend to move upwards over time but oscillate around a mean or fair value. Here are three reasons why the long term trend is up.

1 – Ingenuity and excellence

How is wealth created in Australia?

Only a mere quarter of a century ago more than two thirds of the stock exchange’s value in Australia was accounted for by mineral wealth. We simply dug stuff up out of the ground and we flogged it.

Not much value added, just the sheer volume of minerals pillaged from the earth.[sam id=40 codes=’true’]

Today, only around a quarter of our stock market’s capitalisation is resources-based. Instead, Australia is a thriving hotbed of manufacturing, financial, technological and intellectual ingenuity. We create value through innovation and expertise.
Our own wealth and the value of our companies increase as a result.

2 – Inflation

Inflation has been high and it has been low, but the long-term trend is for our currency to devalue.
Inflation is presently low, and the target range of inflation in Australia today is 2-3%, so we have a plan for moderate inflation to continue.
Companies generate higher profits and the prices of goods and commodities increase each year in part because each year our currency is worth less.
inflation-long-run

3 – Survivorship bias

Survivorship bias is the logical error of concentrating on things which have survived, so that companies which fail can sometimes be excluded from index data. This can lead to overly optimistic beliefs due to the failures being ignored.
Take a look at a list of the top companies from a couple of decades ago and you’ll be amazed at the number of companies which no longer exist. Some of the highest-profile Aussie failures included HIH, Ansett and Allco.
It’s hard to imagine today that some of our top companies may one day no longer be with us.
Stock exchange data measures an index of existing companies, not those which have gone up in smoke.
A further fine example of survivorship bias is that of a fund manager’s selection of available funds today – it will surely only include only those funds that are successful now! Losing or underperforming funds are closed or merged into other funds and thus poor performance is excluded.

Is property a productive asset?

You could waste an awful lot of time and energy debating this point with equities-only investors. My advice to you is this: don’t bother.
The prices of well-located properties benefit from the increased wealth of a country as companies create value and distribute wealth to shareholders via dividends, as share prices increase and as employees are paid higher salaries and bonuses.
People need somewhere to live. Unless someone comes up with a new political ideology that I can’t presently think of, property investors will always own some of those places.
All other arguments are intellectual twaddle.
I don’t hear too many people complaining each time I write out a stamp duty cheque for tens of thousands of dollars, by the way!
dwelling prices

Taking action

While there will always be those who tell you now must be the worst time to invest because either because stock and property prices are at all-time highs or because they are falling, we need to see beyond the short-term horizon.
Where will prices be in 30 years? Will we wish we had stockpiled more assets or sat on the sidelines and pontificated?


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Pete Wargent

About

Pete Wargent is a Chartered Accountant, Chartered Secretary and has a Financial Planning Diploma. He’s achieved financial freedom at the age of 33 - as detailed in his book ‘Get a Financial Grip – A Simple Plan for Financial Freedom’. Pete now manages his investment portfolio, travels and works as a consultant in the finance industry from time to time. Visit his blog


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