A STAAR SYSTEM Working Principle Examined

By J. Andre Weisbrod

When I am asked why I believe in stock ownership, I respond with a question: what is the essence of the economy? Is it found in bank certificates of deposit (CDs)? No. Is it in the government? No. How about real estate? Closer, but still no.

The essence of any economy is the exchange of goods and services. These goods and services must be created, harvested, mined or otherwise packaged and presented for exchange. Where does this take place? In a free enterprise system, the majority of economic exchange is generated by companies, whether they be behemoths like General Electric or sole proprietorships such as a small bookstore. Bank CDs don't make or create anything. Neither do U.S. Treasury Notes. Nor does real estate, unless somebody makes it productive through farming or mining or placing a business on it. Gold doesn't produce anything. It doesn't do any work; it just sits there.

But aren't companies risky? What if the economy collapses? I could lose everything in the stock market.

True. But in such an extreme scenario, what do you think your CD or Treasury Note will be worth? The ability of the bank to pay interest and make a profit is predicated on its lending to companies and people who make money from business activities and pay a higher interest to the bank than the bank pays out on its saving instruments. The government's ability to back its debt instruments is solely dependent upon businesses producing enough profit from goods and services to allow them to pay taxes. People can only pay taxes if they have jobs, and those jobs come from companies. Public sector jobs are provided by taxes which come from... that's right, companies.

Take away the companies and where will the goods and services come from? If the collapse of communism illustrates anything, it is that governments have a very difficult time being the economy. Effective creation and exchange of goods and services thrive best in an environment where private ownership is dominant.

Quite simply, people care more when they are owners, and they care less, or not at all, when the opportunity to own is not permitted or highly restricted. It is ingrained in human nature. To believe this you only need to be a landlord for a short period of time. Most people take better care of property they own than property they rent.

Stocks truly represent the future of the economy. If my assumption is that the economy has no future, that it is going to collapse, then I should probably consider moving to another country that shows more promise. And I certainly don't find the prospect of hoarding gold and food and then protecting it with a shotgun very realistic, appealing or consistent with my Christian beliefs.

But if my assumptions include that people will continue to find creative ways to produce and exchange goods and services and that the economy will grow, then I cannot afford not to own stocks. They are the single best chance I have of participating fully in the future of the economy.

Are there a lot of risks? You bet. But with adequate diversification and a long-term view, your chances of keeping pace with the economy are pretty good.

When asked, most people say that the worst period of time for the stock market was during the great depression of the 1930s. I disagree.

After the crash of 1929, it took the stock market a little over seven years to recover its inflation/deflation-adjusted value. But it will surprise many people to learn that the longest inflation/deflation-adjusted recovery period of the century was during the inflationary period from 1973 to 1984. On an inflation-adjusted basis, that twelve year period was really the worst period for the stock market.

It is a dramatic truth that if companies (i.e. stocks) had not recovered during either of these periods, the country would have collapsed. Since then there have been a number of significant market downturns, most recently in 1987 and 1990. It took about two years for the market to recover its relative purchasing value after the 1987 crash and about six months after the 1990 downturn.

But despite the risks, the stock market has been the most reliable place to achieve a real return above inflation and taxes over long periods of time. Will there be another market crash? Almost certainly. Will we be able to forecast the exact time and avoid it? Probably not, at least not without some luck or providential insight. But does that make me fear stocks. Absolutely not. I'm on board for the long haul.

However, I don't have all my assets in stocks. There are appropriate planning reasons for owning other types of assets, including CDs, bonds, money markets and real estate. That's why I believe nearly everyone needs to undertake some careful financial planning before making major investment decisions.

But a large portion of my long-term investments will be in diversified stocks. I believe that for many people, their biggest risk is to not own any stocks. My long-term assumption is that the economy will survive and grow. I want to participate as fully in the economy as possible. And companies are the economy.

Copyright 1996, J. Andre Weisbrod

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