What's the greatest wealth generation machine known to humankind?
Posted on . 3 min read
Author: Gagan
What is the greatest wealth generation machine known to humankind?
It’s the stock market.
But why?
Based on 25 years of experience observing it and 15 years of experience actively participating in it, I believe stock market outperforms all other types of investments for the following reasons:
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Best Ideas & Founders Win: Many businesses are started by extremely passionate and slightly paranoid founders and entrepreneurs every single day of every year. Only the best of the best of these founders and ideas go on to become successful enough to list as public companies via IPO.
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Easier Access to Money/Capital: A public company can raise money in many different ways: sell more shares, raise debt, etc. This lowers the cost of borrowing money, which helps them invest in more products and more innovation.
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Talented Workforce: Public companies are able to hire really talented people by paying them better wages (afforded by easier access to capital) and also stock/equity as a way of profit sharing. This aligns the incentives of the workforce and shareholders.
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Transparent Operations: Companies (have to) spend a tremendous amount of time to build their books in a transparent way because the government regulations require them to. I would wager that a public company does a better job of tracking every dollar they earn and spend than about 99% of the general population. Because they are required to!
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Accountability: Transparency is not very useful without accountability. Public companies are held accountable by (allegedly) independent boards, shareholders, short sellers, activist investors, regulators, employees, local governments and perhaps more entities. If companies and its executives do not perform, they are (eventually) shown the door.
Is it now any surprise that a system that:
- makes the really smart & passionate people compete on ideas and execution,
- rewards them with cheap capital,
- which lets them hire other smart & passionate people to grow these ideas and execute better,
- ensures that businesses run transparently to reduce fraud,
- holds the management accountable for long term growth, has created the greatest amount of wealth in the history of humankind?
No, it doesn’t surprise me a bit!
Here's the best part: By investing in the stock market, you make money by letting others do the work on your behalf. Economists love to say that "there ain't such a thing as a free lunch". But getting great returns by investing money in the stock market is pretty close to free lunch! As the chart shows, even the biggest crises of the past seem like small bumps in the journey to wealth creation via stock market.
Join Xillion to get ideas on how to get started or to up your investing game.
In the next post I will discuss why S&P 500 is a great investment for almost every single investor. Stay tuned!
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