Market corrections are uncomfortable. Investors’ emotional responses are rooted in the worry that a catastrophe will occur. Our companies go bankrupt. Stock prices go down and STAY DOWN…or become worthless.
The plain truth is that there is no basis for this happening. Stocks are not priced in a vacuum. Simply stated, the more money companies generate and the faster they grow, the more they are worth.
So let’s take a big picture view. We know that the worth of the economy is the sum of the value of goods and services produced. It is made up of thousands of companies. Twenty-five years ago the value of the U.S. Gross Domestic Product was $6 trillion. By 2005 that number had grown to $13 trillion and it now stands at $18 trillion. Corporate profits grew alongside, from $265 billion in 1990 to $1.8 trillion today.
The question to ask during these times is not whether equity markets are vulnerable over the short term. They are. The question to ask is how large the economy is going to be in 5, 10, or 30 years? And how great will corporate profits be as a beneficiary of the larger economy?
Making decisions based on the short term price action of the equity market puts our wealth in jeopardy. Focussing on the long term, in our experience, is the best path toward wealth creation.
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