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Your take: Is stock investing for suckers?

Posted By Claes Bell On 10/25/2013 @ 8:30 am In Your Take | 9 Comments

I don’t blame people for wanting to give up on investing in stocks.

In the last 20 years, we’ve had a massive tech bubble burst, two recessions and a financial crisis that cut the value of the S&P 500 by more than half in a matter of months.

If stocks were a party guest, they’d be the rowdy drunk who you finally stop inviting to things after they break their third lamp.

The proof is in the numbers: a July survey by Bankrate.com asked Americans what the best way to invest money you won’t need for 10 years or more. The most popular answer, with 26 percent of the vote, was cash. Cash! People would rather accept an average return of less than 1 percent (and much less in many cases) than get into stocks again.

The second most popular answer was real estate, which has admittedly done pretty well lately, but historically returns about the same as inflation. Even gold, which has lost more than 20 percent of its value over the last year, finished ahead of stocks! In fact, only 14 percent of people said stocks would be the best way to invest long-term.

Why giving up on stock investing is wrong

I understand that sometimes it’s tempting to look at stock and think, “Hey, that’s just a bunch of worthless paper. Look at how the price is constantly jumping around … it must be a scam.” But stock represents a piece of something real. When you buy stock in FedEx, you own a tiny piece of their vast army of trucks, planes and warehouses, and all the cash flows they generate.

It’s just math that if the companies you’ve invested in are generating positive cash flows, those flows will eventually go to shareholders in one of two ways: either through reinvestment in the business (buying more trucks), which increases a company’s value (and the value of your little piece of it), or through direct payouts like dividends or stock buybacks.

Of course, some companies will never generate positive cash flows for investors who buy in today. And it can be really hard to predict whether an individual company will end up as a KMart, where shareholders’ capital goes to die, or a Google, generating billions of dollars in income every year.

Fortunately, index funds make it cheap and easy to buy a small piece of the whole stock market, rather than taking a chance on one company. Some companies will win, some will lose, but in order to believe that you can’t make money investing in a domestic index like the S&P 500 over the long term, you have to believe that American companies will not, as a group, make money.

Death, taxes and corporate profits

I’ve lost faith in a lot of things over the course of my lifetime: Santa Claus, the Miami Dolphins and the U.S. political system’s ability to effectively govern, to name a few. But if there’s one thing that appears to be a constant, it’s corporations’ ability to hoover money out of our pockets day-after-day, month-after-month, year-after-year. Every time you have to pony up $10 to send a small package at FedEx, pay yet another damned late fee to Chase because you forgot to mail your credit card payment on time, or fill up your tank with overpriced gas at an ExxonMobil station, their shareholders get a cut. I firmly believe that if there’s ever some kind of global nuclear war or other apocalyptic disaster, the only things left on earth will be dirt, cockroaches and multinational corporations.

At the end of the day, you can either get a piece of all that action and let those companies work for you, or continue accepting whatever a bank feels like paying you in a money market account somewhere. I’m not saying all your money should go in stocks — everyone has different needs when it comes to investing, and the way people allocate their assets should reflect those needs. But for the vast majority, especially young people starting to save for retirement, not putting any money in stocks at all is a mistake that makes life harder than it has to be.

If you don’t believe me, think about rich people you know, either in-person or from the headlines. How many of them do you think have no stock investments at all? How many of them think stocks are a scam?

So I’ve told you what I think about stock investing. Now it’s time to give me your take: Do you invest in stocks? Why or why not?

(Photo: Flickr user Azureon 2)

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