10 truths about the stock market

Core Insights - Long-term investing requires tolerance for volatility, with historical bear markets showing significant declines, such as a 34% drop in the S&P 500 from February 19, 2020, to March 23, 2020, and a 57% decline from October 9, 2007, to March 9, 2009 [1][2] - The S&P 500 has historically generated positive annual returns, but with an average drawdown of 14% during those years, indicating that bull markets are often accompanied by volatility [2][3] - Since 1926, there has never been a 20-year period without positive returns in the stock market, demonstrating resilience despite various economic challenges [3][4] Market Characteristics - The stock market is a place where thoughtful investors can accumulate wealth, despite its intimidating nature and the potential for rapid losses [5] - Average annual returns of about 10% are often cited, but the market rarely delivers this in any given year, as illustrated by the chaotic nature of annual returns since 1926 [6][7] - Stocks offer asymmetric upside potential, with the maximum loss being 100% while the upside is theoretically unlimited, as evidenced by the S&P 500's increase from a low of 666 in March 2009 to over 6 times that value today [8][9] Earnings and Valuations - Long-term stock price movements are primarily driven by company earnings and expectations regarding those earnings, making them the fundamental reason for investing [9][10] - Valuation methods can indicate whether a stock is cheap or expensive but provide little insight into short-term price movements, as prices can remain misaligned for extended periods [11][12] Market Sentiment and Risks - Investing in stocks inherently involves risks, and there will always be factors causing concern among investors, even in favorable conditions [12][13] - The most destabilizing risks are often those that are not widely discussed, as commonly cited risks are typically already priced into the market [14][15] Market Dynamics - The S&P 500 experiences significant turnover, with new companies frequently added as older ones fail, contributing to overall market returns [15] - The stock market performance is closely tied to the U.S. economy but does not equate to it, as the market reflects the largest companies that often have global operations [16][17] Conclusion - Despite potential for a prolonged bear market, the stock market has an upward bias driven by demand for improvement and innovation, leading to revenue and earnings growth, which ultimately drive stock prices [18][19]