Most investors are apparently obsessed with short term or even immediate outcomes, partly due to an in-built survival instinct that humans are born with which ensures our survival.
The self-preservation instinct quite a useful behavioural mechanism for genuinely threatening situations – helping us to get out of the lounge room extremely quickly when Dancing on Ice is on the television, for example.
But thinking of our immediate survival doesn’t always tend to help us quite so much when dealing with volatile markets – and volatility tends to be part and parcel of markets which produce capital and earnings growth.
With most of us living longer, at least on average, we should be doing the opposite and thinking of much longer term outcomes.
The power of capitalism
There are forever plenty of people who are permanently bearish or pessimistic, some saying that capitalism is bound to fail this time around, due to it all “being different” for some reason or other (the theory that robots will take over all of our jobs has been especially popular recently).
It’s easy enough to see why some people think in this manner, because in the short term capitalism is so obviously imperfect, while cyclical economies go through good and bad periods which can last for some time.
But over the long term, so far at least, it’s generally been a losing bet to underestimate the dogged power of capitalism.
Think of what human ingenuity has achieved in the last 20 years, or even in the last decade.
Technological advances have been proceeding at a preposterous pace!
Heck, when I talk about or even just remember how life was growing up in Yorkshire, it sometimes almost sounds as if I was growing up as a Victorian chimney sweep compared to today. Yet it wasn’t even that long ago!
And, strewth, when my parents talk about growing up in Liverpool and the West Midlands, it’s as if they lived through the Long Depression of the 19th century (in reality it wasn’t that long after The Blitz, to be fair).
The world moves on at an exuberant pace, and in the future earnings and employment will be created in sectors, businesses, industries, product lines, and services that today have not yet even been imagined.
As a race our potential for manufacturing, financial, technological, and intellectual ingenuity and expertise is almost without limit.
And over a long enough time horizon the future earnings generated as a result of this boundless creativity will approach infinity, pushing markets and total wealth created ever higher.
Now it’s often said that Australia’s stock markets have “gone nowhere” over the last decade, which is sort of true from a valuation or sentiment perspective.
Yet when looking at the index on an accumulation or total return basis (inclusive of dividends), it’s surely only a matter of moments before the index yet again breaks a record high – as it always does over time.
In fact, the ASX 200 net total return index has broadly tripled over the past decade and a half.
Similar outcomes are seen in property prices.
There’s a lot of column space taken up predicting the next correction, no doubt.
But over the long term it’s all come to nought, at least in the capital cites (granted, some mining towns are rural areas have deflated).
Capitalism: short and long term
Over the short term, of course, capital can and does get badly misallocated.
We saw this in Australia through the latter stages of the resources construction boom, when a fair number of marginal mining projects passed feasibility to the construction phase even though history will probably record that they should never have been awarded a green tick.
Worse, several million dollars of capital was allocated to the production of Dancing on Ice, irrational reality television exuberance of the most tragic kind that was predestined to deliver sub-optimal returns.
Still, eventually the unviable and unprofitable projects will fail, be sold off, mothballed, or shuttered (alas Dancing on Ice was axed after only one series, even before cashing in on the reunion show).
And through creative destruction capitalism ultimately does a fantastic job to ensure that capital flows to where the next new profitable ventures can be found.
And over the very long term, the total earnings and wealth created as a result of this reallocation of capital will approach infinity.
Capitalism to the rescue
Of course, there will always be people who argue the bear case: that capitalism is finished, and the system is somehow “broken”, and it’s different this time, and we’re all doomed, and so on.
There were people saying the same thing five years ago, and ten years before that, and twenty years before that.
But they’ve always been proven wrong in time, so the odds are good that you’ll probably do better not to join t hem.
Some of these ideas were neatly summarised by Steve Forbes here (“How capitalism will save us”).
Free enterprise will unleash creativity, energy, inventiveness, and will ultimately bringing prosperity to millions, he argues.
Of course, it’s a free world and there’s nothing to say that you have to believe in the power of free markets and capitalism!
Though if you don’t you probably shouldn’t be investing in equities and real estate markets in any event.
But here’s the thing: free markets and capitalism actually don’t care what you think, regardless!
They will keep doing what they’ve been doing for generations, finding new ways to overcome hurdles and challenges, to create ever greater earnings and ever greater wealth
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