The Case For Equities

The start of a new year is a wonderful time to re-establish the few fundamental principles that guide us on our journey towards lifetime financial success, which is what ultimately provides independence, freedom, and opportunity to our families.

As a reminder, 2022 was the first year of negative growth for global equities since 2018. With no short list of global concerns still worrying investors, human nature (being always a failed investor) may, at this point, be tempted to turn away from the one asset class that has historically been responsible for the bulk of investor wealth creation.

And so, as we head into an uncertain 2023, we are forced to decide what this means for world markets and our financial plans. To this end, we hope that the short defence of equities laid out below will help you to remain invested with confidence, knowing that the weight of market history supports your decision.

The Greatest Compounding Machine

The risk of not re-establishing in our minds the reasons for allocating the large majority (if not all) of our long-term capital to the great companies of the world is that we become tempted by alternative asset classes and investment fads that are sold so efficiently by the financial services juggernaut during the periods after a market decline.

Despite the horse having already bolted in these instances, investors are presented with complex and unnecessary investment products designed for past market conditions. The fact that the future never looks exactly like the past is of no concern to those who have already collected their fees.

But what exactly do we place our faith in while recent returns, current market sentiment, and the short-term outlook are negative? While it’s true that there are no facts about the future, we do have the ability to lean on a century of market data and experience; a period during which negativity and world chaos reigned almost constantly.

The key learnings from this century of modern investing, which our investment philosophy is based on, are:

1. The economy cannot be forecast with any certainty. We may be fighting inflation and fearing a recession, but the outlook can and will change without warning.
2. Even if the economy could be forecast, the market’s declines and advances cannot be consistently timed. Historically, the market’s turn has arrived in advance of the economy’s improved signals.
3. The long-term returns of global equities, underpinned by the great companies of the world’s ability to grow earnings and dividends consistently, significantly exceed the rise in the cost of living.
4. To earn these returns, investors must endure the frequent but temporary declines in market values, which we emphasise cannot be timed.
5. And so, we conclude that the only sure way of earning the full returns provided by owning this asset class is to remain invested at all times.

The Important Decision

Even with the decrease in the perceived value of the companies we buy from daily, their management teams continue to find optimal ways to operate in the current conditions. Their innovation and ingenuity will likely see these companies continue to grow their earnings and the dividends paid to owners.

This brings us to the one defining question every investor must regularly answer in their investing journey.

Will I be an owner of these companies, or will I loan to them?

The optimal choice for growing your family’s wealth, freedom and opportunities has been proven over time. Indeed, companies wouldn’t borrow from risk-averse investors if they weren’t confident of growing the value of their businesses by more than the lending rate. As passive owners, we benefit by going along for the ride.

We’ve learnt from previous corrections that by the time the trouble has cleared, the market has long since resumed its inevitable climb up the wall of worry.

So, regardless of whether a protracted recession is upon us or whether inflation continues to rage in 2023, we urge you to behave in such a way that you are guaranteed the full returns that being an equity owner provides. You can do this by staying invested and adding money when you can. The pendulum may be swinging to one extreme at the moment, but it will find itself on the other extreme in due course.