Do the Odds Favor Stock Investors?

by | May 8, 2023 | General

Stocks go up 3 years out of every 4

The majority of people who could invest in stocks don’t do it. They perceive that the risks are too high and they settle for lower returns that promise a smoother ride.

The graphic below says they are making a mistake. Yes, the stock market offers very uneven returns year to year. Dock Street clients know that only too well—2022 was a very painful year while 2023 has been highly rewarding, so far. But over time stocks offer tremendous opportunity.

This graphic sorts the positive and negative years in stocks into nine return outcomes, ranging from losses of 40% to gains of 50%. Most of the time stocks offer positive returns—see the green years. In fact, 3 out of every 4 years since 1945 produced gains for shareholders. (60 out of 77)

This calls into question the many investment advisors who promise portfolio protection on the downside and argue that limiting losses produces above average returns. This appeals to the natural fear of loss that keeps most people out of the market, but the odds are stacked against investors who focus on short-term loss prevention.

Our approach is to find highly advantaged businesses and hang on through thick and thin. The ride can be a bumpy one as the 2021 through 2023 period attests. However, we think the emotional costs of short-term losses are a small price to pay for the significant long-term opportunities offered by common stock ownership. 

We agree with Warren Buffett (again), “We prefer a lumpy 15% return to a smooth 6% return.” 

Best regards,

Daniel A. Ogden

Dock Street Asset Management, Inc. is an investment adviser registered with the U.S. Securities and Exchange Commission. You should not assume that any discussion or information contained in this letter serves as the receipt of, or as a substitute for, personalized investment advice from Dock Street Asset Management, Inc.

It is published solely for informational purposes and is not to be construed as a solicitation nor does it constitute advice, investment or otherwise.

To the extent that a reader has questions regarding the applicability of any specific issue discussed above to their individual situation, they are encouraged to consult with the professional advisor of their choosing.

A copy of our Form ADV Part II regarding our advisory services and fees is available upon request.

Our comments are an expression of opinion. While we believe our statements to be true, they always depend on the reliability of our own credible sources. Past performance is no guarantee of future returns.