In my last post, I spoke of my friend who will be teaching an ad hoc class of high school students about all things finance over smores and a campfire. I surmised, like Peter Lynch, that most students graduating from today’s classroom have been tested on what a cosine is but haven’t a clue the difference between a stock and a bond.
So, in lieu of a campfire, I digress.
Stocks represent the ownership of a business. The overwhelming vast majority of companies are intelligent, profit seeking businesses, run by remarkably capable professional managers for the benefit of the shareholders. These managers are tasked with enhancing shareholder value over time.
Every day, 7.5 billion people wake up and make economic and financial decisions in their own best interests. Says one, “I need food today.” Says another, “I need gas for my car.” Says yet another, “A latte sounds really good today.” These companies respond to those buying impulses and signals by creating products and services to meet the needs of humankind. Hence, they gather more revenue, employ more people, innovate new products and services, generate more profit and the flywheel spins onward.
If you think about it, stocks are a great mechanism to fully capture human ingenuity. And those who risk their hard earned money to invest in them, despite the sureness of short term swings, will be rewarded richly in the long run.