It's Not Quick But It Works
“Optimism often sounds like a sales pitch, pessimism sounds like someone trying to help you”
Morgan Housel is right. Pessimism comes off as sophisticated and helpful while having a positive outlook often comes off as looking ignorant or naive.
Put another way, fear sells.
It makes sense why your brain is drawn to negativity. Imagine two of our ancestors on the African Savanah. They walk up to a bush and hear a loud “Roar!”. The one that immediately imagines the worst and runs is the one that survived. The eternal optimist that guessed it was a bunny with a cold didn’t.
Today, you rarely face lions hiding in bushes. But you’re still left with a brain that’s wired to imagine the worst.
Insurance salesman. The 24-hour news cycle. Even the guy on YouTube selling his options trading course. They all use the potency of fear to get you to do what they want.
They all want you to believe the same thing—that the world is scary and the stock market is risky. Your brain craves control. So it’s easy to believe the confident well-dressed man when he says the world is falling apart and he has all the answers—just buy the product or keep watching the show.
But I’m here to tell you that stocks are not risky.
(The world is also not falling apart. But that’s a subject for another day)
Risk vs Uncertainty
If I were to ask you what you’re doing tomorrow you’d be able to answer pretty quickly with a high level of accuracy. The same goes if I asked what you’re doing next week.
But what if I asked what you’re doing 30 years from now? You’d have no clue.
The stock market works in the exact opposite way. You don’t know what tomorrow will bring. But you can be pretty dang sure what’ll happen in the next 30 years. And that is that the market will be up.
Your mind is searching for certainty. That’s why stocks feel so scary—in the short term, they’re anything but certain.
But if you zoom out far enough, stocks are as sure of thing as you can get:
The worst average annual return for any 30-year period for the S&P 500 is 7.8%. Let me say that again—that is the worst average yearly return over any 30-year period since 1926.
For context, if you had $100,000 invested over that 30-year period compounding at 7.8%, you’d have just under $1 Million. If you were to get the average of 11.2% over that period, you’d have $2.4 Million.
When it comes to building wealth, the only risk that should matter to you is permanent loss of capital. In that sense, your cash is far riskier than stocks.
On average, your cash is losing 3-4% per year in purchasing power. Over a 20-year period, that’s a guaranteed loss of over 50%.
Stocks are uncertain in the short term. But they’re not risky. Cash feels certain—and in the short term, it is. But over the course of your life, your savings account presents a much bigger risk than your stock portfolio.
Well, if it’s that easy…
Why doesn’t everyone just do it? Good question. Conceptually, it truly is that easy. Save 15-20% of your income in a diversified portfolio of stocks for 30 years. You’re all but guaranteed to be a millionaire.
The grand challenge of investing is not tactics, it’s temperament. Building wealth is less about managing your portfolio and more about controlling your actions.
Charlie Munger once said,
“The first rule of compounding is to never interupt it unnecessarily”
There are countless reasons people come up with to interrupt the compounding of their wealth. When it comes to investing, you are your own worst enemy.
The stock market is just a reflection of human progress and innovation. Anyone and everyone can capture the value that comes from it. It’s been doing its job for over a century. If you’re not getting rich off of it, it has nothing to do with the market and everything to do with how you’re using—or not using—it
The first step is to realize stocks are not risky. They’re actually one of the best tools for building wealth to ever exist.
Start investing. Never stop. Get rich.
It’s not quick but it works.
Here’s to making money matter!