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10 truths about the stock market 📈

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Summary

This article outlines 10 truths about the stock market. It discusses how the stock market has overcome various challenges, how it has rarely ever returned an average return in a given year, and how stocks can offer asymmetrical upside. It also explains that while stock prices are tied to the trajectory of the US economy, they are not the same thing. The article then discusses why the stock market has an upward bias and states that earnings drive stock prices.

Q&As

What are the 10 truths about the stock market?
The 10 truths about the stock market are: the long game is undefeated; you can get smoked in the short-term; don't ever expect average; stocks offer asymmetric upside; earnings drive stock prices; valuations won't tell you much about next year; there will always be something to worry about; the most destabilizing risks are the ones people aren't talking about; there's a lot of turnover in the stock market; and the stock market is and isn't the economy.

How has the stock market performed over the past century?
The stock market has generally risen over the past century.

What are the average annual returns of the S&P 500?
The average annual returns of the S&P 500 are usually positive, but the average drawdown (i.e. a decline from its high) is 14%.

What drives stock prices?
Earnings drive stock prices.

How does the stock market differ from the US economy?
The stock market reflects the performance of the biggest companies, while the economy reflects all of the business being conducted in the US. The stock market typically has access to lower-cost financing and has the scale to source goods and labor more cheaply. Additionally, many of the companies that make up the stock market do business overseas.

AI Comments

👍 This is a great article that provides a succinct mental framework for investors to understand the stock market. The ten truths presented are helpful and informative.

👎 The article fails to mention the potential risks associated with investing in the stock market. It also fails to provide any actionable advice for how to mitigate these risks.

AI Discussion

Me: It's about the stock market and it discusses 10 truths about the stock market. It talks about the importance of the long-term view, the unpredictability of returns in the short-term, the asymmetric upside to investing in stocks, and the fact that the stock market isn't the same as the economy.

Friend: Interesting. What implications does the article have?

Me: Well, it suggests that investors should focus on long-term returns, not short-term gains. It also means that investors should be aware of the risks associated with investing in stocks and should not expect average returns. Furthermore, the article highlights the importance of earnings in driving stock prices and the fact that the stock market is always changing with new companies being added and old companies being dropped. Finally, it indicates that the most destabilizing risks are the ones that people aren't talking about.

Action items

Research the different indices and stocks that make up the stock market to gain a better understanding of the market.
Create a long-term investment plan that takes into account the potential for short-term volatility.
Monitor the news and economic indicators to stay up to date on potential risks and opportunities in the stock market.

Technical terms

CFA: Chartered Financial Analyst. A professional designation given by the CFA Institute to financial professionals who have passed a series of exams and met other requirements.
Dow: Dow Jones Industrial Average. A stock market index that tracks the performance of 30 large, publicly traded companies in the United States.
S&P 500: Standard & Poor's 500. A stock market index that tracks the performance of 500 large-cap companies in the United States.
Nasdaq: National Association of Securities Dealers Automated Quotations. A stock market index that tracks the performance of over 3,000 publicly traded companies in the United States.
Drawdown: A decline from a peak in the value of an investment or portfolio.
Intra-year: Within a year.
Valuation: The process of estimating the value of an asset or company.
Mean-reverting: A tendency for a variable to return to its average or long-term value.
Earnings: The amount of money a company makes from its business activities.