Streetwise for Friday, March 9, 2018

After a couple of weeks on a tranquil ocean voyage to and from the Caribbean, during which I gave a series of lectures on investment theory and practice, I had hoped to return a tranquil Wall Street environment. It was obviously not to be.

The 2008 financial crisis and the aftermath of the Great Recession that followed has left scars on the investment public that will remain for many years to come. Some of the pain form the past will likely return as Congress proceeds to water down or remove completely the safeguards put in place by the Dodd-Frank legislation that was put in place to try and prevent a recurrence of what happened in 2008.

When Microsoft co-founder Bill Gates was asked if we could expect to see another financial crisis like the one in 2008, he offered a sad but decisive answer, “Yes. It is hard to say when, but this is a certainty.”

“Fortunately,” he said, “we got through that one reasonably well. Warren Buffett has talked about this and he understands this area far better than I do.”

Nonetheless, both Gates and Buffett are generally optimistic about the economy. In a recent essay for Time Magazine, Buffett stated that years of growth “certainly lie ahead,” and “most American children are going to live far better than their parents did.”

Buffett pointed out in that interview that you can expect America’s population to increase about 0.8 percent per year. Under that assumption, gains of two percent in real Gross Domestic Product (GDP), that is without nominal gains produced by inflation, will annually deliver 1.2 percent growth in per capita GDP.

While that growth rate may sound to you as being on the paltry side, over time compounding works its magic. In 25 years, or one generation, 1.2 percent annual growth raises our current $59,000 of GEP per capita to $79,000. That $20,000 increase guarantees a far better life for our children.

Gates went on to say that despite his prediction of economic volatility, he was quite optimistic about how innovation and capitalism will improve the life for humans everywhere.

While Gates takes a more global outlook, Buffett continues to emphasize that investors need to keep a level head and stay the course. He has maintained that watching every nuance of Wall Street activity is a mistake. Techniques that essentially amount to timing the markets will simply result in poor returns.

If you are not impressed, consider what Buffett pointed out happened in his lifetime. Back in 1930 when Buffett was born, the symbol of American wealth was John D. Rockefeller Sr. Since his birth, Buffett pointed out that his upper-middle-class neighbors enjoy options in travel, entertainment, medicine and education that were not available to Rockefeller and his family. With all his riches, John D. could not acquire the pleasures and conveniences we now take for granted.

So, if you are glancing up to see if the sky is falling, as the soothsayers of doom are advocating, consider that funny thing happens on the way to Wall Street…stocks over time continually outperform other investments.

As I have explained repeatedly, the key reason for long-term share price performance is because businesses retain some portion of their earnings, which they then reinvest to generate additional earnings and dividends. Driving it all is the basic theory of compounding. (And as has been shown recently, there is a correlation between high dividends and rising share prices.)

The compounding aspect was first pointed out in 1924 with the publication of a slim little book titled “Common Stock as Long-Term Investments,” written by Edgar Lawrence Smith. Legendary economist John Maynard Keynes, in reviewing the book, was quick to further publicize that most important point.

At the same time, it is no secret that Wall Street is driven by greed and a liberal interpretation of what denotes fair play. No, the investment playing field is not level and it never has been. However, you should never view the Street’s antics as an impediment. There are always opportunities for increasing your wealth.

Lauren Rudd is a financial writer and columnist. You can write to him at Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to