A different way to think about stocks

The superior long term returns of equities, always have been and always will be, available only to people emotionally capable of embracing uncertainty.”   Nick Murray

Think of a large growing company.  Let’s take Boeing Corp.  Right now, if you tie up your money in a bond with them for 10 years, they will pay you about 4.5% interest per year.  At the end of the 10 years you get your money back but there is no chance of growth of principle.   So, let’s think about this.  A great company like Boeing is willing to pay you this interest rate.  In fact, they want to pay you interest so they can use that money to grow profits. That is called leverage.

You can rest assured that Boeing needs to make way more than the 4.5% they are paying you on the money you lent to them!  They must know or feel certain that they can make at least twice that on your money. 

You, or you and your advisor, need to have solid reasons why you believe the company will meet this target.  But you don’t need to beat the target.  Even if Boeing* grows earnings and dividends at 5-6% you are ahead of the game.  Historically and future projections are way ahead of that.

So, why lend them money when you can own the stock and be in league with the company as it tries to grow earnings and dividends?  Because most people don’t have the emotional and mental wherewithal to withstand uncertainty and sharp fluctuations, except of course when they are up! 

So, overall, you have received much better returns in Stocks than in Bonds.  Can that change?  It can for short periods.  But if the bonds continue to make more than stocks, that means that companies, will never grow past the rate of borrowing meaning almost all of them will die.  And if almost all companies die, the last thing you will have to worry about is your portfolio!  So, don’t worry about it in the first place.  Just know that ownership of companies is where the real money is made.  You will never get rich making “interest”.

This is not an offer or recommendation to buy shares of Boeing (BA).  I do not own shares of BA.

* Boeing* currently has an earnings yield (predicted growth rate plus dividend) of over 23%!   (Average of 21 analysts compiled by Yahoo Finance on 2-7-19.)