A common mistake many investors can make is to conflate politics with their long-term investment policy. They cannot make many bigger mistakes. This letter is to explain exactly why and to put some hard data behind it.
It is perhaps human to want to escape political turmoil, but it is suicide to want to escape the equity market (stocks). More specifically, personally speaking, I may not be a fan of the current Washington, D.C. administration’s near fascination with tariffs (for instance), but I am an undying fan of the thousands of companies that have to find a way through this turmoil. Why? Because they deliver on the goods. The ‘goods’ are navigating their companies through the unrelenting pressures of marketplace uncertainty while battling hard-nosed competitors in order to deliver a regular stream of profits for their shareholders through the efficient delivery of some product or service to their customers. I take liberty with ABC’s Wide World Of Sports old tag line to frame what must occur for every company: “there is the thrill of victory, but there is also the agony of defeat”. Nonetheless, the aggregate productive capacity of the United States means companies have always delivered on the goods. Speaking frankly, they must deliver on those goods or they go out of business.
The above statement is a reality. It’s not a wish. It’s not an aspiration. I’m not quoting some capitalistic ideal written by an academic or consultant. I am speaking cold hard facts. Having run 5 companies, I know those facts intimately and have the scars on my back to prove it. The biggest companies in the world – publicly traded companies – experience the same pressures and confront the same realities. If you don’t run a successful business, you lose money. If you lose money long enough or severe enough, you go out of business. Capitalism is no place for pity or special favors. If on the other hand, the pressures of business and the startling creativity and ingenuity of mankind are harnessed, you not only stay in business, you thrive. You have more money to invest in employees and research. Your shareholders encourage you to do it because you deliver on the goods. If profits ensue, then stock prices go up as the latter is based on the former. The germane question today is: Has that pressure worked to bring benefit to the average investor? The answer is an unmitigated yes as these statistics demonstrate:
- If we go back a little bit in history, for the half century from 1973 through 2024, the S&P 500 (measuring just the index of the 500 largest publicly traded companies in the United States) has gone up about 50 times in a little over 50 years[i]
- During this period, the cash dividend of the index increased 25 times, while inflation (as measured by the CPI) went up 7 ½ times[ii]
- Nonetheless, during that same time, the market forces at play have wreaked havoc on investors emotions and perceived ‘stability’ with these realities:
- The average intra-year decline (peak to trough) of the S&P 500 is about 14.2%[iii] (see attached)
- Just in the last quarter of a century, the S&P 500 index about halved in value twice (the other was in 1973-75[iv]), once in the dot-com bust of 2000-02 and the Great Recession of 2007-09[v].
- At the onset of the COVID-19 pandemic, the index declined 24% in 33 days[vi]
- But IN SPITE OF those massive fluctuations just mentioned, I ask you to appreciate that the average return of the S&P 500 was an almost uncannily steady 10.99% and 12.39% over those 25- and 50-year histories, respectively[vii]
- I would only add the stark but very accurate fact that $100,000 invested in the S&P 500 just as the first of those three roughly 50% declines kicked off in January 1973 and left to compound grew to $20 million late in 2024[viii]
Thus, we see clearly in the forementioned facts that in spite of the economic forces at work in the guts of companies (which is why they call it ‘work’), we have external market forces at play. Market forces involve the psychology of individual human beings and there are few things as variable and unpredictable as the emotional state of the average investor. Unfortunately, I authoritatively tell you that no one knows when the market will go up or down. However – and this is the key point – the permanent premium return of 10% plus in the market and the frequent temporary declines form an organic whole. Said slightly differently – the significant market declines aren’t just normal, they are NECESSARY to the premium return.
Please be assured that I do not think you are the average investor. I similarly do not want you to think I am predicting a recession as some pundits are musing. What I want to emphasize to you is that there will be unusual periods of market volatility – and we might be in one now – but we planned for this reality. As long as you don’t give in to the emotions that ‘This time is different’, you will not only be okay, but your financial security will benefit from the volatility with supreme returns. As Warren Buffett’s famous sidekick partner wisely noted:
“The first rule of compounding: Never interrupt it unnecessarily.”
P.S. In a sincere tribute to every man or woman business owner / executive in the world, below is the Teddy Roosevelt quote ‘The Man In The Arena’ from his “Citizenship in A Republic” speech. May you be inspired and never give up.
“It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.”
― Theodore Roosevelt
It remains my deep and distinct honor to serve you well.
Patrick Zumbusch
Founder and CEO
Wellspring Financial Partners
[i] “More Notes On The Package” (Nick Murray Interactive, December 2024)
[ii] -Ditto-
[iii] “The Bumpy Road To The Markets Long-term Average” (Dimensional Fund Advisors, February 19, 2025)
[iv] “1973-1974 Stock Market Crash” (Wikipedia, March 29, 2025)
[v] “More Notes On The Package” (Nick Murray Interactive, December 2024)
[vi] -Ditto-
[vii] “Average Historical Stock Market Returns for S&P 500 (5-year up to 150-year averages)” (C. Mitchell, Trade That Swing, January 6, 2025)
[viii] “More Notes On The Package” (Nick Murray Interactive, December 2024)
