Macro
Last updated
Last updated
Price ultimately reflects only one thing: the balance between supply and demand. But what drives demand for financial assets?
For stocks, ownership represents a claim on a company's assets and future earnings. When you own shares, you literally own a piece of the business. If a company creates value and generates profits, owning it becomes inherently rewarding. Dividends provide an additional benefit, distributing a portion of profits directly to shareholders.
Owning quality stocks is like owning a cash-generating machine. As long as the machine runs efficiently, you benefit from keeping it. The market exists to find equilibrium prices for these ownership stakes.
Are traditional hypotheses about efficient markets valid? Not entirely. Markets can be, and often are, irrational. Manipulation is possible, with some participants artificially inflating prices to deceive others. Economic bubbles form when collective psychology drives everyone to buy, pushing valuations far beyond reasonable levels.
When these bubbles burst, even companies with steadily increasing profits may see their stock prices plummet. This is why technical analysis precedes fundamentals. Yes, a company may be reporting better earnings quarter after quarter, but if the broader market is bearish, it's usually wiser to align with market direction rather than fight it.
As the saying goes, "Markets can remain irrational longer than you can remain solvent."
No, index prices do not go up in the long term. Here’s why, with a focus on specific indices versus a global index, tailored for young investors.
Economic Struggles: Indices reflect the economies they track. If a country faces recessions, deflation, or an aging population, its index can stall.
Bubbles and Crashes: Overvalued markets can collapse, and recovery might take years, or decades.
Lack of Innovation: If an economy doesn’t adapt or grow, its index may lag while others rise.
Peaked at 38,957 in 1989, then crashed due to a bubble. It took over 30 years to recover, slowed by deflation and a shrinking workforce.
Lesson: Even big indices can stagnate for a long time.
The Global Index Stands Out
Why It Works: A global index (like MSCI World) includes many countries and sectors. If one fails, others can pick up the slack.
Human DNA: The world keeps innovating and growing, it’s part of human nature. This drives long-term gains.
Ups and Downs: It might drop 50% in a crisis, but over decades, it tends to recover and hit new highs.
Time Is Your Friend: If you are young, you can ride out the dips with patience.
Dollar-Cost Averaging: Invest a fixed amount in MSCI World regularly, regardless of price. If the market drops by 20%, 30%, or even 50%, increase your buys.
Note: This section is under construction. Future content will explore monetary policy impacts, fiscal policy effects on markets, global macro trends, inflation/deflation dynamics, and practical implications for investment strategy.
Better Alternative: Implement a strategy as explained in the section to achieve better returns with less risk than pure indexing