29 Jul Investing Deconstructed: Breaking it down to its essential elements
Investing can often be confusing and even intimidating. The endless jargon used by financial professionals is unintelligible to the common person. The media does not make it easy either. We are bombarded by headlines on the minute-by-minute movement of the stock markets. One day, the FTSE is rising, the next, billions are being wiped off. Much of this is meaningless and irrelevant to a long-term investor.
How do we make sense of the business of investing? One way to cut through the inherent complexity is to break things down to their essential elements. In science, we are taught that an element is the simplest form of matter and cannot be broken down any further. It is the primary form of a substance.
What if we take the same approach with investing? What if we deconstruct every investment to its simplest form? That way, we can really assess if the risk is worth taking.
For instance, at Tandem we often talk about investing in global capital markets, but what does this mean? Let’s unpick this. When we say we are ‘investing in the global capital markets’ we mean buying tiny bits of some 43,000 publicly listed companies across the world with a collective value of around £57 trillion!
This means, that as an investor in the global stock markets, some 43,000 CEO’s and millions of employees go to work every day to make you richer! They produce goods and services, which they sell to each other and the rest of the world. Therefore, as a global equity investor, you are investing… or more so, banking on the collective effort, creativity and intelligence of these CEOs and their army of employees.
By implication, you profit from the collective performance of these companies. This is what legendary investor Jack Bogle meant when he said that “the stock market is a giant distraction from the business of investing”. In the long run, he stated that, “investing is not about stock markets at all but about enjoying the returns earned by businesses.”
So rather than saying ‘we are investing in the global stock market’, we really should be saying ‘ we are investing in the great companies of the world.’ We are backing their CEOs and their hordes of employees to create and sell goods and services that other people want and need. We are investing not in markets, but in their collective intelligence, creativity and efforts.
Now, it is not impossible that these companies will collectively fail to turn a profit in any single year. When they do well, your investments do well. When they don’t, your investments do not. But over the long term, the overall direction of travel is that they are producing more, selling more and generally finding better ways to serve their customers. This means that over time, the value of these companies tends to go up. For instance, the collective value of global stock markets stood at $2.5 trillion in 1980, according to the World Bank. By 2000, it had reached $30.9 trillion, $60 trillion by 2007, only to dip back to $32.2 trillion during the financial crisis of 2008. But that was temporary, these companies soon resumed their advance, reaching a whooping $68.8 trillion (£57 trillion) at the end of 2018.
What is more, new companies are being created every time, and many of these ultimately make their way to the stock market as they seek capital to grow and invite others to participate in their success. For example, the World Bank recorded an estimated 17,000 publicly listed companies in the world in 1980. By 2000, the number more than doubled to 40,000! Today, there are 43,000 of them!
Thinking of investing this way brings confidence and clarity. It becomes crystal clear that we are not gambling on the stock-market. We are investing in real businesses, managed by real people, creating and selling real products and services in over 195 countries. While the stock market may fluctuate and while the world more generally is always in flux, a £57 trillion basket of some 43,000 companies cannot be inherently unstable. Governments come and go but every day, 43,000 CEOs and millions of their employees across the world go to work to do the best they can, for themselves and for you, the investor and ultimate owner of these companies.