Best reason why the market will always go up?

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neomutiny06
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Best reason why the market will always go up?

Post by neomutiny06 » Sat Feb 27, 2016 1:41 pm

Hi all. In major conversations with friends. What is the best reason you have heard for why the global stock market will always go up?

Ari
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Re: Best reason why the market will always go up?

Post by Ari » Sat Feb 27, 2016 1:49 pm

Not sure what you mean by "go up", but as long as companies make profits, stock owners will eventually do so, too.
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Re: Best reason why the market will always go up?

Post by am » Sat Feb 27, 2016 2:03 pm

No guarantees. Japan 89' comes to mind as an exception. If plans don't work out in 15-30 years, the only thing we will be left with is a whiny post on bogleheads...

neomutiny06
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Re: Best reason why the market will always go up?

Post by neomutiny06 » Sat Feb 27, 2016 2:16 pm

am wrote:No guarantees. Japan 89' comes to mind as an exception. If plans don't work out in 15-30 years, the only thing we will be left with is a whiny post on bogleheads...


Yes Japan, but if you invest in the global stock fund (VT), how could the entire world market not grow over 15-30 years?

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Re: Best reason why the market will always go up?

Post by magicrat » Sat Feb 27, 2016 2:18 pm

In my view, the investment thesis for global equities is twofold: 1) The population will continue to increase, and 2) Businesses will continue to create new products and services that solve problems that others are willing to pay for.

#1 will happen for the foreseeable future, barring some catastrophe (which could happen), and is not that interesting to debate with friends.

#2 is the fun debate. Humans have a lot of decision making and information processing biases, and find it very difficult to sit here today and imagine how the world could be radically different in the future. In investing, this results in a "where will the growth come from" skepticism. I like to use thought experiments to debate this. For example, pick a point in time, say 1990. Imagine you and your friends having this same discussion. You'd have no idea where growth would come from, hence couldn't imagine it, hence might conclude that the stock market can't go up if there's no growth. But what would you be missing? Apple, Amazon, Google, Uber, Shale Fracking, and countless other new technologies, productivity improvements, products and services that solved problems we didn't even know we had, and for which we happily pay, and which were 100% impossible to predict in 1990.

So the question is, do you believe there are similar revolutions to come? I do, but who knows from where. Clean energy? Bio-mechanics? Artificial Intelligence? Colonizing Mars?

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Re: Best reason why the market will always go up?

Post by visualguy » Sat Feb 27, 2016 2:40 pm

neomutiny06 wrote:Hi all. In major conversations with friends. What is the best reason you have heard for why the global stock market will always go up?


There is no inherent reason for this. It's based on the past, and some expectations about the impact of population growth, technological advancement, and economic policy. There are stock markets where this does not happen, and entire regions where it didn't happen during some long periods of many years.

It's not even the most relevant question because from a more practical point of view you care more about the chances that it will be meaningfully up when you need the money. This is still pretty much a crapshoot even if you believe the stock market will go up eventually because it may take a couple of decades or more for it to go up in a meaningful way, and you may not have that time horizon.

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Re: Best reason why the market will always go up?

Post by InvestorNewb » Sat Feb 27, 2016 2:44 pm

Population increase.
My Portfolio: VTI [US], VXUS [Int'l], VNQ [REIT], VCN [Canada] (largest to smallest)

am
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Re: Best reason why the market will always go up?

Post by am » Sat Feb 27, 2016 2:48 pm

On the other hand, if we don't believe the market will go up than what is the point of all of this? I can be a consuming debt ridden maniac and on my way to the Masserati dealership and after going to the mortgage lender to buy my McMansion. I am sure some would do this with my income and assets.

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Re: Best reason why the market will always go up?

Post by Dandy » Sat Feb 27, 2016 2:51 pm

Yes Japan, but if you invest in the global stock fund (VT), how could the entire world market not grow over 15-30 years?


We tend to assume that things will be generally ok in the future but there are global risks that will take down not only equities but much of the world as we know it. Science and tech have often come to the rescue but will that always be the case.
1. Wars - is the nuclear threat less now? What about N. Korea, Iran or ? An unbalanced leader with access to the "button" is all you need. There is no lack of suicide bombers now.
2. Significant global warming that raises sea levels - Most major cities are on or near the ocean. Or another ICE age?
3. Meteors, comets and other scary things in the universe. What if the east coast got hit with 3 category 5 hurricanes each year?
4. Lack of sufficient clean water or food.
5. Plague/pandemic - global interaction makes the spread of a plague much easier. We have a hard time fighting viruses.

I'm not overly worried about any of the above but there are lesser and/or local variations of those type of things that can hit and cause major problems. It doesn't mean mankind will be wiped out just that recovery may take decades or preventing them may consume a lot of resources and limit growth.

Global investing might mitigate some of these rare but possible risks

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Re: Best reason why the market will always go up?

Post by MEA » Sat Feb 27, 2016 2:57 pm

neomutiny06 wrote:Hi all. In major conversations with friends. What is the best reason you have heard for why the global stock market will always go up?
it's complicated.

Here's a simple analogy.

The stock market is like a yo-yo, it goes up and down and up and down. The string of the yo-yo is tied to GDP. We all do the same thing, climb on go for a ride, and pray to God the string doesn't break in our lifetime.
It is speculators speculating on other speculators speculations. It is a tale told by an idiot, full of sound and fury signifying nothing.

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Re: Best reason why the market will always go up?

Post by mptfan » Sat Feb 27, 2016 2:57 pm

am wrote:On the other hand, if we don't believe the market will go up than what is the point of all of this?

Dividend income.
I eat risk for breakfast. :)

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Toons
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Re: Best reason why the market will always go up?

Post by Toons » Sat Feb 27, 2016 3:26 pm

Population growth,earnings :happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

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Re: Best reason why the market will always go up?

Post by lack_ey » Sat Feb 27, 2016 3:31 pm

neomutiny06 wrote:
am wrote:No guarantees. Japan 89' comes to mind as an exception. If plans don't work out in 15-30 years, the only thing we will be left with is a whiny post on bogleheads...


Yes Japan, but if you invest in the global stock fund (VT), how could the entire world market not grow over 15-30 years?

Declining productivity, private companies outperforming publicly traded companies (could be structural or a result of fiscal policy to favor the former), heavy corporate prioritization of workers or customers over shareholders (though this is kind of already how it is in many countries), resources destroyed or spent elsewhere (e.g. war or climate change effects and eventualities falling on the high end of pessimistic forecasts), a paradigm shift in terms of investor preferences for assets devaluing stocks, new social orders displacing capitalism or confiscating some assets in enough countries, etc.

Global stocks lost money in real terms from about 1900-1922, 1938-1952, 1972-1985, and 2000-2012, eyeballing the Credit Suisse yearbook. Granted, only the first period was 15+ years.

I expect global stocks to earn money, but I don't think it's as automatic as you do. The possibility that they don't isn't all that remote, especially when you consider the impact of yet-to-be-discovered black swans.


am wrote:On the other hand, if we don't believe the market will go up than what is the point of all of this? I can be a consuming debt ridden maniac and on my way to the Masserati dealership and after going to the mortgage lender to buy my McMansion. I am sure some would do this with my income and assets.

That's a ridiculous straw man. A nonzero probability of the market not going up is not the same thing as a certainty that the market goes down, and the correct responses to these scenarios are very different. And even if it's certain that stocks lose money, there are other assets including cash that one could hold. Furthermore, even if the rate of return is negative on everything, it's still worth saving money if the marginal utility of that money later at the reduced amount is greater than the marginal utility of spending it now.

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Re: Best reason why the market will always go up?

Post by Clive » Sat Feb 27, 2016 3:42 pm

The Fed/Bank of England ...etc. typically target a 2% inflation rate. Take a simple business - a farm that owns some land, grows stuff - that is sold and provides a dividend. At some future date, when perhaps too old to work the land yourself you might sell it on, reasonably for a comparable amount to what you paid for it in inflation adjusted terms, and where the Dollar/Pound/whatever has been devalued (inflation) such that you get paid more in $/£ terms compared to what you paid for the land. Rather than owning all the land (business) yourself, issuing shares in that business ... see similar (percentage) price appreciation and dividend rewards for each of the shareholders.

A reason why states push for inflation is that its a form of taxation. 5% inflation, 5% cash deposit interest, 20% tax on nominal 'gain' = 4% net interest received (1% of total value 'taxation'). More typically that 'tax' is more like 0.3% of total value, perhaps 2% inflation, 15% tax on interest/dividend/gain; But at times might spike to 5% levels (15% inflation, 33% tax rate) such as UK mid 1970's.

Noteworthy is that during the 1700's/1800's share prices and inflation broadly were flat, but with interim high levels of inflation and deflation. The primary benefit of stocks came from dividends. The value of money stayed level with the value of gold for around 200 years (the two were pegged/interchangeable/convertible at the level as pegged by Issac Newton (Master of the Royal Mint) in the early 1700's). Subsequently we've seen a progressive breaking away from the gold standard, with a complete separation since 1968 (President Nixon - paying for the Vietnam war). Across the 1900's therefore the price of gold has periodically been revised upwards, initially in steps (during the 1930's in the US, investment gold was 'confiscated' (bought at the pegged market rate) before in 1934 the peg rate was raised something like 75%), more recently via free-float (market driven). Now money isn't backed by anything (no gold convertibility) other than a promise (prayer). UK banknotes for instance still bear the Royal pledge "I promise to pay the bearer on demand the sum of twenty pounds" (or whatever note value).

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Re: Best reason why the market will always go up?

Post by visualguy » Sat Feb 27, 2016 4:12 pm

am wrote:On the other hand, if we don't believe the market will go up than what is the point of all of this? I can be a consuming debt ridden maniac and on my way to the Masserati dealership and after going to the mortgage lender to buy my McMansion. I am sure some would do this with my income and assets.


Not necessarily a bad idea... McMansions where I live have been a much better investment than the stock market. I don't know about Maserati, but Seinfeld's Porsches have certainly given him a better return than the stock market.

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Re: Best reason why the market will always go up?

Post by bonn » Sat Feb 27, 2016 4:16 pm

mptfan wrote:
am wrote:On the other hand, if we don't believe the market will go up than what is the point of all of this?

Dividend income.


Dividends subtract from the stock price, so dividends are not sustainable without stock price increases to pay for them. In any case, any reasonable interpretation of this discussion will include dividends as part of the return and assume that dividends are reinvested (though possibly with the tax expense that dividends cause subtracted).

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Re: Best reason why the market will always go up?

Post by 691175002 » Sat Feb 27, 2016 5:08 pm

bonn wrote:Dividends subtract from the stock price, so dividends are not sustainable without stock price increases to pay for them. In any case, any reasonable interpretation of this discussion will include dividends as part of the return and assume that dividends are reinvested (though possibly with the tax expense that dividends cause subtracted).

Your cause and effect is backwards. Stock prices react to dividend payments. A company doesn't pay its dividend out of its market cap, it pays it using cash from the balance sheet.

A profitable company can pay its employees and owners even if the market thinks it is worth nothing. Obviously the market would be wrong (a company generating profit is clearly worth something) but it could happen.

In the short term stock price has no relevance to a companies operations. Its only if they need to raise additional capital (or if someone is trying to take them out) that it becomes important.

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Re: Best reason why the market will always go up?

Post by joebh » Sat Feb 27, 2016 5:12 pm

neomutiny06 wrote:Hi all. In major conversations with friends. What is the best reason you have heard for why the global stock market will always go up?


The global stock market will not always go up. It went down just a few weeks ago, for example.

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Re: Best reason why the market will always go up?

Post by whodidntante » Sat Feb 27, 2016 5:14 pm

neomutiny06 wrote:
am wrote:No guarantees. Japan 89' comes to mind as an exception. If plans don't work out in 15-30 years, the only thing we will be left with is a whiny post on bogleheads...


Yes Japan, but if you invest in the global stock fund (VT), how could the entire world market not grow over 15-30 years?


Financial pornography predicts doom and gloom for mankind daily, it seems.

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Re: Best reason why the market will always go up?

Post by rustymutt » Sat Feb 27, 2016 5:17 pm

It won't always go up. What makes anyone think that the markets always goes up. There can long periods of the markets going down. So the same question could be ask. What's the reason that the markets will always go down? I rest my case. There has always been a positive lifetime slope to markets.
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Re: Best reason why the market will always go up?

Post by Dirghatamas » Sat Feb 27, 2016 5:18 pm

neomutiny06 wrote:Hi all. In major conversations with friends. What is the best reason you have heard for why the global stock market will always go up?


OP you should google "stocks vs. GDP". There are several research articles on this. Leaving aside whether the world as such will grow or not (world GDP), is the benefit one gains from ownership over a long time. This is the part many miss and is the part I am most certain/bullish about (leaving aside whether the world will grow or not).

The cash yield (dividends + buybacks) on world stocks over the last few years has been 5-7%. This is the earnings (beyond cost, investment in future growth, repairs etc) that companies are giving back to you each year. Assuming you reinvest it fully and ignoring taxes, you basically own 5-7% MORE of the world's economic engine each year if you buy and hold till retirement. Even if the earnings of the world's businesses don't grow over time, you will own a lot higher % of those earnings in the future and that will be positive.

Think of this as owning a % of a farm or a % of a large commercial building/real estate. The farm produces wheat each year and the rental produces rent each month. Lets say the price of the farm or rental building don't go up (in real terms) over the next 30 years. So what? This is actually quite normal and the price of farmland and real estate on average has actually just met inflation over the long term (so real price increase = 0). Each year, you own a bigger and bigger % of these properties.

This (cash yield) was originally the reason to hold stocks. At the time, the only cash yield used to be dividends. Long time back( more than 100 years back), it was considered axiomatic that stocks dividend yield must be higher than good bonds: otherwise, why would anyone own them to take ownership risk? Not much has changed, really all that has changed is that the cash yield also includes buybacks. You have a choice of 5-7% real yield vs. 1% (real) bond yields and you get to take the risk for that. The idea that price of stocks always goes up is not (to me) at the core of why hold stocks. That (price increase) would be nice but not the minimum I assume.

And now off to my sufferfest bike ride with the beautiful day we are having :beer

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Re: Best reason why the market will always go up?

Post by selftalk » Sat Feb 27, 2016 5:56 pm

People in societies will always try to better their standard of living and health and hence more research and development resulting in better products and methods and newer companies coming on the stock markets.

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Re: Best reason why the market will always go up?

Post by timboktoo » Sat Feb 27, 2016 6:01 pm

1. Inflation.
2. So long as free markets function, people will do what is in their own best interest. They will produce what will give them the most, consume what will give them the most and invest in what will give them the most.

- Tim

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Re: Best reason why the market will always go up?

Post by bottlecap » Sat Feb 27, 2016 6:17 pm

Should trend up as long as there is economic growth.

JT

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Re: Best reason why the market will always go up?

Post by LeisureLee » Sat Feb 27, 2016 6:18 pm

If I remember correctly, Piketty's book (Capital in the 21st Century) said that growth of economies (GNP growth) comes from population growth (more workers) and productivity growth (more done per worker). Productivity growth comes from using capital to buy additional equipment which makes workers more productive, workers being better educated or better trained, and improvements in technology. If you don't think our economy is done finding ways to be more productive, you'd expect continued economic growth.

As noted above, too, even if the economy doesn't grow, businesses still produce profit and pay dividends to owners. The price one must pay to buy those dividends can fluctuate, but owners wouldn't be willing to own businesses if they didn't produce any profits.

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Re: Best reason why the market will always go up?

Post by wearahat » Sat Feb 27, 2016 6:30 pm

Dirghatamas wrote:This (cash yield) was originally the reason to hold stocks. At the time, the only cash yield used to be dividends. Long time back( more than 100 years back), it was considered axiomatic that stocks dividend yield must be higher than good bonds: otherwise, why would anyone own them to take ownership risk? Not much has changed, really all that has changed is that the cash yield also includes buybacks.


Bingo. Dividends - the means in which companies pay owners the profit made from operations is the underlying reason to hold stocks. People then use this money, money being a medium of exchange, to spend on goods and services which keeps the economy going. Somewhere along the way some people got mixed up and started to believe that companies should not pay a dividend because of tax reasons. Companies can buyback their stocks but this only defers tax, as soon as someone wants to spend the money then they'll have to pay tax on the gain.

691175002 wrote:Your cause and effect is backwards. Stock prices react to dividend payments. A company doesn't pay its dividend out of its market cap, it pays it using cash from the balance sheet.

A profitable company can pay its employees and owners even if the market thinks it is worth nothing. Obviously the market would be wrong (a company generating profit is clearly worth something) but it could happen.


Bingo. Stock prices represent the value the public places on the company at any given time. Dividends don't subtract from the stock price at all! Dividends are sustainable as long as the company is making money every year.

The net income on the income statement shows how much money the company has made during the year and cash flow from operations shows how much actual cash they've made during the year. This is either kept on their books as retained earnings or removed from their books via dividends paid.

A profitable business can pay zero dividends, increase the cash they have on their balance sheet and the stock price can decrease at the same time. Because the stock price reflects what the public believes is the value of the company, factors such as negative sentiment and reduction in trading multiple will result in a reduction in the share price. Therefore, the company can have more net assets than the year before, but the amount of money you receive in liquidating your assets is lower simply because the market doesn't want to pay you as much.

This is why people estimate the cash flows of the company and aren't willing to part with their shares if the market isn't paying what they believe to be the fair value.

Assuming the market is trading at a constant multiple, the value of the market should increase every year simply because the market is profitable every year therefore their net assets are increasing every year.

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Re: Best reason why the market will always go up?

Post by Clive » Sat Feb 27, 2016 7:38 pm

neomutiny06 wrote:What is the best reason you have heard for why the global stock market will always go up?

Not always up, but generally rise over time because each stock has limited downside (100% loss), unbounded potential upside (...100% ...500%, 600% ....) such that when averaged (diverse portfolio of stocks/entire market) the gains outweigh the losses.

There's a tendency towards a common pattern where sorted individual asset total gains typically has a left tail with a few big losers, a right tail with a few big winners, and a large set of middle-roaders. Generally those left and right tails are of similar numbers, but the average gain of the few big winners is greater than the average loss of the few big losers.

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Re: Best reason why the market will always go up?

Post by Alex Frakt » Sat Feb 27, 2016 11:46 pm

The short answer is that markets don't have to go up. But it will as long as markets exist and there is economic growth, whether through increases in population or productivity. Even in a static economy, stock prices would eventually become static, but market indices (except the Dow 30) would still go up since they incorporate dividends into the index price and no one would buy a stock in a static economy unless it paid dividends.

Remember when you buy a stock, you are buying a part of a company. Presumably you are only buying part of that company because you believe it's a good idea based on A) the value of the company's future profits which will be returned to you (dividends + growth) and/or B) that someone else will buy it off you for a larger price (speculation). If the consensus is that the current price is too high for A and/or B to be true, then no one will buy and the price will drop to where it is true. Similarly, if it's too low, current holders will refuse to sell and the price will increase.

It may help to think of a simple business such as a franchise. How much you are willing to pay for that franchise obviously depends on the income stream. If they demand too much up front or in monthly fees for you to make a profit sufficient to cover both your effort and the risks of things going wrong, then you would not get involved.

So absent growth, stock investors only pay a stock price where the dividend is equal to the bond yield plus a premium for taking on the additional risks of equities. With growth, investors will pay a higher price, but will still demand a discount for taking on the risk that the growth does not appear. When it does appear, as long the discount demanded does not change, the price will naturally go up. You can think in terms of p/e or p/b here. If the ratio stays the same and either earnings or book value increases, then the price has to increase as well.

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Re: Best reason why the market will always go up?

Post by bonn » Sun Feb 28, 2016 1:46 am

691175002 wrote:
bonn wrote:Dividends subtract from the stock price, so dividends are not sustainable without stock price increases to pay for them. In any case, any reasonable interpretation of this discussion will include dividends as part of the return and assume that dividends are reinvested (though possibly with the tax expense that dividends cause subtracted).

Your cause and effect is backwards. Stock prices react to dividend payments. A company doesn't pay its dividend out of its market cap, it pays it using cash from the balance sheet.

A profitable company can pay its employees and owners even if the market thinks it is worth nothing. Obviously the market would be wrong (a company generating profit is clearly worth something) but it could happen.

In the short term stock price has no relevance to a companies operations. Its only if they need to raise additional capital (or if someone is trying to take them out) that it becomes important.


You really think that market cap and balance sheet are not related? You think that removing $X from a company does not decrease stock price? You, personally, would value a company the same with $1 in the bank as the same company with $50 billion in the bank? A profitable company is not valued at $0 by the market in the long term, which is what the word "sustainable" hints at. Stock price doesn't necessarily relate to a company's operations, but a company's operations does relate to its stock price, which is why dividends subtract from the stock price (and yes, also the balance sheet).

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Re: Best reason why the market will always go up?

Post by wearahat » Sun Feb 28, 2016 2:22 am

bonn wrote:Stock price doesn't necessarily relate to a company's operations, but a company's operations does relate to its stock price, which is why dividends subtract from the stock price (and yes, also the balance sheet).


Dividends aren't paid out of the stock price. They're paid out of the company's cash assets.
You can have dividends with an increasing, decreasing or flat stock price.
You can't have dividends if there is no cash to pay for it.

To put the idea to the test think about companies trading on the market. There are cases where the market cap of a company is less than the cash it holds. If they pay out all their cash, can the company have a negative value? Answer is no. So, does dividends come out of the stock price? No.

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Re: Best reason why the market will always go up?

Post by Quark » Sun Feb 28, 2016 5:46 am

The posts in this thread are focused on economic fundamentals and ignoring price (based on my quick read).

Markets will go up so long as participants have a reasonably accurate handle on future growth. If participants wildly overpay for stocks (i.e., their forecasts are too optimistic), then it might take an unrealistic level of growth to cause markets to increase, at least within a time frame that's relevant to individual investors.

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Re: Best reason why the market will always go up?

Post by Impromptu » Sun Feb 28, 2016 6:25 am

Efficiency and productivity have grown a lot in the United States and other developed markets, but there is still much to be innovated, and productivity may still have room to go up (rise of the robots).

And in much of the rest of the world, productivity still has a long way to climb, so there is still huge potential there for decades to come.
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Re: Best reason why the market will always go up?

Post by Stasis5001 » Mon Feb 29, 2016 12:52 am

I think it's a lot simpler, and does not require economic growth.

Consider a stock with guaranteed dividend of $1 a year, indefinitely, and the discount rate is ~11%, and inflation at 0% (not important). Then the NPV formula values this annuity at $10.

Okay, consider the position the owner of the annuity is in one year from now. They own one share, plus the $1 dividend. The stock is still worth $10 at that time, and so the owner now has an $11 position. But if the company does not issue the dividend, the value of the position is be the same, so either way, it's worth $11. It went up, and all it took was stable cash generation.

Really, what we're saying is that assuming money now is worth more than money in the future, things have to be priced with the expectation of future growth of the asset price because otherwise no rational investor would purchase it. Of course, certain environments could have different discount rates, which seems to be the case today. But since the cost of carrying money is approximately zero, any investment has to have at least a 0% nominal expected return.

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Re: Best reason why the market will always go up?

Post by bonn » Mon Feb 29, 2016 5:50 am

wearahat wrote:
bonn wrote:Stock price doesn't necessarily relate to a company's operations, but a company's operations does relate to its stock price, which is why dividends subtract from the stock price (and yes, also the balance sheet).


Dividends aren't paid out of the stock price. They're paid out of the company's cash assets.
You can have dividends with an increasing, decreasing or flat stock price.
You can't have dividends if there is no cash to pay for it.

To put the idea to the test think about companies trading on the market. There are cases where the market cap of a company is less than the cash it holds. If they pay out all their cash, can the company have a negative value? Answer is no. So, does dividends come out of the stock price? No.


No one is suggesting that stock price is literally a bank account and no one is suggesting that stock price moves because of dividends and for no other reason in the world. You can have dividends without cash by borrowing. Dividends do not necessarily subtract at a 1:1 ratio (it can be more or less) and companies have other assets and debts than cash, so for both reasons there is no contradiction with holding more cash than market cap. The point stands: dividends are not sustainable without offsetting stock price increases.

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in_reality
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Re: Best reason why the market will always go up?

Post by in_reality » Mon Feb 29, 2016 6:05 am

bonn wrote:The point stands: dividends are not sustainable without offsetting stock price increases.


I know what you are thinking but your way of phrasing is confusing.

A company pays a dividend and the stock price decreases to account for the dividend. The stock price decrease is offset by the dividend.

Dividends are not sustainable without profits.

To show your phrasing is weird consider this where a company starts paying a dividend for the first time --->

The price will never increase beyond it's starting point.

Stock A $100
dividend $10 --> spent by retirees
Stock A $90
$10 profit
Stock A $100
dividend $10 --> spent by retirees
Stock A $90
$10 profit
Stock A $100
Last edited by in_reality on Mon Feb 29, 2016 7:33 am, edited 1 time in total.

wearahat
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Re: Best reason why the market will always go up?

Post by wearahat » Mon Feb 29, 2016 6:46 am

bonn wrote:You can have dividends without cash by borrowing.


That makes no sense. The company is borrowing cash. Increase cash assets and increase borrowings. Therefore, dividends literally has to come out of cash assets.

Valuethinker
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Re: Best reason why the market will always go up?

Post by Valuethinker » Tue Mar 01, 2016 4:36 am

wearahat wrote:
bonn wrote:You can have dividends without cash by borrowing.


That makes no sense. The company is borrowing cash. Increase cash assets and increase borrowings. Therefore, dividends literally has to come out of cash assets.


Welcome to Modigliani-Miller and their Nobel Prize.

In the absence of taxes and other transactions costs, the shareholder is indifferent to dividends and to leverage (assuming shareholder has ability to fully diversify eg buy Vanguard TSM as an alternative).

The addition of the interest on corporate debt, as a tax deductible expense, changes the picture.

It is value creating for *equity* owners for the company to leverage up, and buy back shares -- it enhances the total value of the firm due to the tax shield on corporate debt.

BY MM most listed companies undergear significantly. Hostile M&A and Leverage Buy Out industry are ways to counteract that.

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Re: Best reason why the market will always go up?

Post by Valuethinker » Tue Mar 01, 2016 4:40 am

Impromptu wrote:Efficiency and productivity have grown a lot in the United States and other developed markets, but there is still much to be innovated, and productivity may still have room to go up (rise of the robots).

And in much of the rest of the world, productivity still has a long way to climb, so there is still huge potential there for decades to come.


Whilst rising productivity improves standards of living (in the long run) it does NOT necessarily increase corporate profits.

Tobacco is a mature industry with declining sales volume in developed markets. Tech is a fast growing industry and the industry of tomorrow.

Yet tobacco has been a superb money generator for shareholders-- high margins, high barriers to entry, high return on capital.

Tech? A few companies have taken more than 100% of the total shareholder returns (ie the magic names Google Apple Amazon Facebook Microsoft etc.).

This is really another way of saying there is a value effect. Slow growing businesses attract less capital and therefore less competition.

Valuethinker
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Re: Best reason why the market will always go up?

Post by Valuethinker » Tue Mar 01, 2016 4:41 am

neomutiny06 wrote:Hi all. In major conversations with friends. What is the best reason you have heard for why the global stock market will always go up?


There is no certainty that it will.

As long as corporate profits grow, and there's no change in the Price to Earnings ratio of the market, then over time equities will have a positive return.

But that's so uncertain over any given sub-period, that you can't state it as certain. Ie over 100 years, yes, assuming capitalism continues in its present form. But over 50? Who knows?

Clive
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Re: Best reason why the market will always go up?

Post by Clive » Tue Mar 01, 2016 6:35 am

Valuethinker wrote:As long as corporate profits grow, and there's no change in the Price to Earnings ratio of the market, then over time equities will have a positive return.

Equities can yield a positive return even with no profit growth, provided the PE changes (price volatility). One firm might at one point see fear for its future drive prices down -25%, as the fear subsides the price might rebound +33% to recover its former price. Product 1.0 (share price unchanged overall), average +4%. Partnered with another stock moving through the same sort of price volatility cycle but that is out of phase and equal amounts allocated to both rebalanced once/year has a portfolio value that is more stable (declines in one offset by rises in another). That characteristic yields a higher reward if addition there are corporate profits growth that compare to inflation (lower down, higher up - such that the product compares to inflation (no change in corporate profits in real (after inflation) terms).

There are three elements involved, price appreciation, dividends, volatility. Some investors concentrate more towards individual elements, a growth investor, a high dividend stock investor, a Options (volatility) trader. Broadly the rewards from each might be expected to compare - otherwise over time investors would concentrate on the sole most consistently rewarding choice alone. Diversifying across all three likely yields lower portfolio volatility than focusing upon one alone. For instance whilst cash (or gold) is a 'unproductive' asset, if stocks are down -25% but cash remains unchanged then the cash purchase power of stock is up +33% and there is scope for cash to earn a 'dividend' by means of volatility.

Since the 1980's we've seen a transition from relatively high to exceptionally low interest rates, conditions that favour price appreciation (and dividend capture). Going forward ??? Perhaps it might be the turn for volatility capture to be the relative outperformer.

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Abe
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Re: Best reason why the market will always go up?

Post by Abe » Tue Mar 01, 2016 6:07 pm

"Over time, the aggregate gains made by Shareholders must of necessity match the business gains of the company." Warren Buffett

Over the long term, when companies perform well, their shares will too.

There are no guarantees, but I wouldn't bet against it.
Last edited by Abe on Wed Mar 02, 2016 5:54 pm, edited 1 time in total.
Slow and steady wins the race.

mancich
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Re: Best reason why the market will always go up?

Post by mancich » Tue Mar 01, 2016 6:09 pm

Human ingenuity will always exist. This will lead to more innovative products. Technology will continue to advance. it is not in our nature to go backwards...

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ogd
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Re: Best reason why the market will always go up?

Post by ogd » Tue Mar 01, 2016 6:21 pm

From weakest to strongest:

1) Population growth. This is likely but by no means guaranteed.
2) Productivity growth. Measured in terms of "stuff you can buy", this is just as good as population growth, but IMHO quite a bit more certain.
3) Accumulated profits. Even if nothing grows from this level ever again, but stays constant after inflation, the total return of the stock market will be in the long term positive. In simple terms, if you owned a restaurant that paid your bills and left you something extra for the savings account, and you never felt like expanding, that savings account would still grow.

#3 is pretty much guaranteed in my mind, even if the term might be uncertain, as e.g. if growth stops we'll first have to suffer a depreciation of that growth. Note that this has nothing to do with dividends, it's simply a total return statement.

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midareff
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Re: Best reason why the market will always go up?

Post by midareff » Tue Mar 01, 2016 6:27 pm

It doesn't always go up. From 5/31/2000 through 2/1/2013 it failed to make new highs. That's near 13 years although it is not very meaningful in an investors lifetime, for folks who started investing in May or June of 2000 it was a very meaningful period.

letsgobobby
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Re: Best reason why the market will always go up?

Post by letsgobobby » Tue Mar 01, 2016 8:55 pm

There is no reason at all that global markets will always go up. Always is a strong word. There have been long stretches - centuries - where human progress has regressed. Think the Dark ages, think the plague, think nuclear war. Unlikely, but you said always. I hold 40% fixed income because I don't believe always should apply to the stock market.

bonn
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Re: Best reason why the market will always go up?

Post by bonn » Tue Mar 01, 2016 10:12 pm

wearahat wrote:
bonn wrote:You can have dividends without cash by borrowing.


That makes no sense. The company is borrowing cash. Increase cash assets and increase borrowings. Therefore, dividends literally has to come out of cash assets.


Dividends usually ARE cash, so in that sense obviously cash has to be involved. I was responding to your statment: "You can't have dividends if there is no cash to pay for it" and this statement was contrasting cash with stock price and other assets, I assumed. If by "you must have cash" you meant to include scenarios like the company selling stock in itself and then using the proceeds to pay out dividends, then what you are saying is true, but in that case there is no contrast to stock price, since stock price can be used to fund dividends (not that I'm advocating doing that).

jimmy
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Re: Best reason why the market will always go up?

Post by jimmy » Tue Mar 01, 2016 10:21 pm

Because Warren Buffett said so..

bonn
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Re: Best reason why the market will always go up?

Post by bonn » Tue Mar 01, 2016 10:37 pm

in_reality wrote:
bonn wrote:The point stands: dividends are not sustainable without offsetting stock price increases.


I know what you are thinking but your way of phrasing is confusing.

A company pays a dividend and the stock price decreases to account for the dividend. The stock price decrease is offset by the dividend.

Dividends are not sustainable without profits.

To show your phrasing is weird consider this where a company starts paying a dividend for the first time --->

The price will never increase beyond it's starting point.

Stock A $100
dividend $10 --> spent by retirees
Stock A $90
$10 profit
Stock A $100
dividend $10 --> spent by retirees
Stock A $90
$10 profit
Stock A $100


I agree with your analysis, though I'd say that it's reality that is confusing rather than the phrasing :) In your scenario, the stock price is increasing in the absence of dividends and then dividends are paid out that offset the increase. That's why there is the word "offsetting" in the phrasing. Assuming reasonable valuation by the market, the fundamental thing that matters is the stock price, not profits, though of course profits tend to have an effect on stock price. To see why that is, consider that a company can at any time issue new stock in itself and sell it or buy back its own stock. So the money that is available for dividends is a function of stock price (i.e. cap) and not of profit.

As a thought experiment, a company could reinvest all available funds so that total expenses equal revenues, yielding a profit of 0, while still sustainably paying a dividend by issuing new stock and paying the dividend out of the proceeds. That is sustainable if the investments increase the value of the company by more than the dividends decrease it. Conversely, a company could cease all investments, take huge profits and pay them out as dividends, but the value of the company would likely drop so the dividend would not be sustainable even though it was only profit being paid out. Profit is irrelevant out of context and the name for the result when the market puts profit in context is stock price.

TomCat96
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Re: Best reason why the market will always go up?

Post by TomCat96 » Tue Mar 01, 2016 11:01 pm

neomutiny06 wrote:Hi all. In major conversations with friends. What is the best reason you have heard for why the global stock market will always go up?



I long have thought about this question. I agree that the most of fundamental level, population growth is the driving force of guaranteeing economies will grow. In fact, I would argue that modern economies with shrinking populations will have trouble growing their markets. See Japan.

Fundamentally, population growth as a driver of economic growth is obvious in some ways. Suppose we have ZERO new technological development. How does the economy grow then? One way to add to the value of the assets of your nation is to build more houses. Certainly buildings and homes are useful enough to be considered as part of the GDP. The higher population will then come to demand these houses and your own, and your economy will grow. It makes sense that the housing market can grow based on nothing but population growth alone.


So your number #1 reason as you asked is population growth.


Other reasons include the fruits of the labor of the existing population. Ideally, the working population produces value. If I build a farm, I will now have additional resources I did not have before. If I own a corporation called farmCORP whose only asset was said farm, then if you could buy the stock of farmCORP, the equity you own from said stock will be greater the longer people till the land. (i.e., the more time has passed)

In a capitalist society, you would hope that people operating in the rational self interest would only till the land if it produced value for them. So too is it with all corporations in the market, not just my hypothetical farmCORP. If people will make individual decisions to generate value for themselves, then over time, they will generate value for the corporations they work for at large.


But make no mistake, there is no guarantee of the above occurring naturally. Alan Greenspan himself said in his memoir that for nations to develop under this economy at least two things are needed: strong property rights and a stable government.

People cannot make decisions to produce value for themselves if they are dying in the midst of war, killing others (destroying value), or can have the value they procure for themselves readily confiscated because of lack of strong property rights.

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HomerJ
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Re: Best reason why the market will always go up?

Post by HomerJ » Tue Mar 01, 2016 11:01 pm

visualguy wrote:
am wrote:On the other hand, if we don't believe the market will go up than what is the point of all of this? I can be a consuming debt ridden maniac and on my way to the Masserati dealership and after going to the mortgage lender to buy my McMansion. I am sure some would do this with my income and assets.


Not necessarily a bad idea... McMansions where I live have been a much better investment than the stock market. I don't know about Maserati, but Seinfeld's Porsches have certainly given him a better return than the stock market.


My McMansion is worth about the same what I paid for it 8 years ago... Mid-west state, so it never really crashed, but it hasn't grown much either.

On the other hand, the money I invested over the past 8 years is up a ton.

You realize, we're both telling the truth here... So what's the lesson?

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