For 99% of human history, you needed to already be rich in order to buy an ownership interest in a prosperous business. Even in old timey England, individual property could not be divided into more than a dozen ownership pieces. If you wanted to make money from a business, you had to possess enough capital to purchase it outright.
The United States did its part to break to break ownership positions into smaller increments by making “share trading” and liquid exchanges a major part of its economic activity. These smaller share increments also had the reciprocal benefit of making it easier for companies to cast a wide net when raising capital that could be used to advance growth at a much faster rate than would be possible if only select financiers could provide the capital.
But still, even with the United States advancing the notion of a highly liquid stock market, business ownership remained the province of the wealthy. In 1936, you had to purchase shares of stock in 100 share increments. The average brokerage trading cost was $250 which was the broker’s compensation for matching you with someone in the world that had 100 shares they were willing to give up.
With these limitations, it was not easy for the middle class to access stock ownership. If you wanted 200 shares of AT&T in 1936, you needed to pay $36 each. Well, that is going to cost you $3,600 plus a $250 fee for a total of $3,850. Guess what? That is the equivalent of money to $55,600 today. In order to get your hands on 100 shares of a favored blue-chip stock, you had to save up for the equivalent amount to the entire year’s salary of a day laborer. You had to be rich to get rich.
It is very easy to lose appreciation for how lucky we are to participate in equity markets without having to save up a year’s worth of income to buy a stock. And if brokerage costs and investment proportions kept pace with inflation since 1936, we would be paying $3,613 to brokers to make stock trades in $50,000 increments today. The system would be rigged against the middle class building passive wealth through the stock market.
I mention this perspective because, throughout most of my years writing finance articles, I have heard people complain about one of their holdings going down 10% or 40% at a moment’s notice. Just look at some of the comments to my Seeking Alpha articles when Exxon, Chevron, and BP were falling during the bust cycle for petroleum-based commodities.
Volatility is a byproduct of being able to buy shares in any increment you want at nearly anytime you want. That privilege requires assets to constantly be priced and repriced. That is why you feel fluctuations in daily net worth.
Personally, I think most people could become better long-term investors if they moved their focus away from fear about volatility and in the direction of gratitude for being able to buy ownership interests in the best corporations that the civilization has to offer. A janitor can buy 10 shares of Coca-Cola online through Computershare and hitch his fortune to a proportional claim on the future of the global beverage market. A school-techer can buy 50 shares of General Electric through Charles Schwab and participate in the growth of the global machinery markets. An engineer can buy 30 shares of Nike through Loyal3 and make a profit from global shoe sales and athletic apparel. A construction worker can set up an Interactive Broker account and buy 20 shares of Boeing and participate in the growth and profit from the 787 Dreamliner.
The ability to save a little something from what you make, and then instantly purchase an ownership share in the absolute best corporations ever created, is a very recent phenomenon. This capacity for passive wealth-building has only existed for 0.01% of the entire length of the world’s history of civilization. People are fixating on the wrong thing. You shouldn’t feel like a victim when you buy publicly traded assets that decrease in daily market value. Instead, you should be ecstatic to inherit a market-based system that lets you acquire small ownership interests in the best cash cows that the world has ever known. When you realize how historically lucky you are to buy those 100 shares of Chevron, you likely won’t panic when it goes from $130 to $70 at some point while you have an ownership claim to the asset.
Originally posted 2016-12-28 18:14:21.