The term “investor class” is sometimes used to describe people who invest in stocks to make money. The investor class isn’t just made up of rich people, since people of all different means own mutual funds that own stocks. And it’s not just educated people, either: everyone knows smart college grads who can’t bring themselves to buy stocks. So what makes someone an investor?
It’s an important question, especially now, with too few people saving enough — or at all — for retirement. And relevant, too, given the headlines that much of the stock market’s gains are going to a relatively small number of people.
Ask someone why they don’t invest and their answers run the gamut: “I’m scared to death of the market;” “the market is going lower;” “I don’t like to lose money;” “the market’s rigged,” to name a few.
What each of these answers has in common is that the non-investor doesn’t believe that he or she can make money by owning stocks.
Of course some people don’t invest in stocks simply because they feel that they can do better by sticking with what they know: investing in real estate, or buying local small businesses, for example.
These people are comfortable with risk — maybe just not with the risk of investing in the stock market — and are also investors, and part of the investor class: when the stock market goes up, they benefit too.
The non-investor is less likely to have access to those kinds of opportunities, and buying rental houses, or investing in office buildings or a local business can require substantial capital up front. This creates a barrier to entry that many can’t afford.
Most non-investors do, however, have access to stocks: more than half of American workers have access to a 401k or other retirement plan through their job, and workers not offered a plan through their workplace could open a low cost investment account with a nominal sum of money.
But they don’t do this. According to a Gallup poll of April 2013, only people with incomes of $75,000 and over believed (by a 2-to-1 margin) that stocks and mutual funds were a better long-term investment than savings accounts, CDs and bonds taken together. Of people with incomes between $30,000 and $74,999, 26 percent believed that savings accounts, CDs and bonds were a better long-term investment vs. 22 percent who answered that stocks and mutual funds were a better long-term investment. And people with incomes below $30,000 were almost three times as likely (34 percent to 12 percent) to believe that savings accounts, CDs and bonds were a better long-term investment than stocks and mutual funds!
After 2013’s better than 32 percent gain (including dividends) in the S&P 500, there was some improvement, but not much, in people’s perception of stocks in the same Gallup poll taken in April 2014 (the number one choice of long-term investment for people in both of those income groups in both years was gold).
Not only was 2013 a good year, but the stock market has rewarded over time as well: including dividends, the S&P 500, for example, has gained an average of about 10 percent per year since 1926, and almost 8 percent per year over the past 10 years, which include the Great Recession years of 2008-09.
Anyone who understands compounding knows what returns like that can mean for their personal wealth. The “Rule of 72” is an easy tool to use in this regard: simply put, it tells you approximately how many years it will take for your money to double at a given interest rate. The formula is R x Y = 72, where R is the interest rate and Y is the number of years it takes to double money. So with a return of 10 percent per year your money doubles roughly every 7.2 years, and with a return of 8 percent your money doubles every nine years or so.
Too many people won’t participate in returns like these because they stay in cash, destined to fall behind inflation, and bonds, which offer little yield in a low interest environment. And the Gallup polls make it clear that the people who stand to benefit the most from long term growth — young adults — are among the least likely to choose stocks.
So how can one speak to someone whose thinking about investing is dominated by truisms such as “past performance doesn’t guarantee future results” and “times have changed?” Especially someone who doesn’t want to drink the stock market “Kool-Aid,” and rejects what they consider an almost religious conviction that the stock market creates wealth.
How does one come to see the world the way an investor does?
A change of perspective is required. The U.S. consumer can easily feel powerless amid the constant barrage of advertising and marketing by big companies in every medium, and lose sight of the fact that the consumer has what the companies want — money.
The same is true for the prospective investor, who can easily be unaware of what investing is really about.
Simply put, the prospective investor, as the owner of money, has two choices to get a return on that money: he/she can either loan it out, or buy something.
The owner of money who loans it gets a bond (or a savings account or CD) in return. The bond is evidence that the borrower promises to repay a certain amount of money at a certain interest rate over a certain period of time. The owner of money who buys something that generates a return buys shares of stock. The stock is evidence of ownership.
No one can say what the future holds let alone what the stock market will do. But one can reliably say that so long as it is riskier to invest in companies than it is to loan money to them, that people who buy stock will get higher returns than people who loan their money. Investors will demand that it be so, and companies will pay accordingly. That is what thinking like an owner is about, and it’s no leap of faith.