The biggest reason stocks go up is pretty simple, in my view: a lot of very smart and hardworking people are working very hard to make stocks go up. In addition, lots of less smart and less hardworking people are also working to make stocks go up. In contrast, very few people are trying to make stocks go down.
While there are shortsellers, they are generally not trying to make stocks go down, i.e. by destroying value. Instead, shortsellers are simply saying that some companies are overvalued, and time and effort is better spent on other companies.
What do I mean by “make stocks go up”? I mean it in a fundamental sense: employees are trying to create value by making products better or adding new markets. Their rewards include stock compensation, bonuses, and promotions, so they are indeed incentivized to create value in whatever way possible. Meanwhile, financiers are trying to allocate capital (an abstract representation of time, effort, and value) in the best way, by optimizing society’s effort. These people are also rewarded with capital gains, bonuses, and promotions.
Given that there is so much effort and incentive to fundamentally increase the value of stocks, why should the market stay flat or neutral? I’m sure someone can try to find some elaborate corner case why this isn’t true, but mostly the reasons stocks wouldn’t go up is if no one is trying (no incentive) or if someone is trying to destroy asset value (expropriation, violent revolution, etc.). If people are trying to build stuff that makes stock prices go up, and there isn’t much effort to destroy them, it’s pretty straightforward that they go up.
For what it’s worth, this is basically Buffett’s view. Also note, the comments about equity risk premium, valuation puzzles, and the efficient market hypothesis miss the point: that’s only a matter of relative returns, not absolute returns. (If your question is about beating the market, then those points are more relevant, but it’s not clear anyone can beat the market today in developed economies outside narrow pockets of inefficiency.) As long as you can build new stuff, you’ll have a reason to invest, which demands a return, hence the positive returns we see. If there’s less “stuff” to build, you can expect lower prospective returns because capital competes for each opportunity, resulting in lower rates and a huge premium on growth opportunities, which is what we observe today.
One last way to think about it is in real terms. If you have a machine that can build more of itself, you will have more of those machines over time, which is a real return.
The biggest reason stocks go up is pretty simple, in my view: a lot of very smart and hardworking people are working very hard to make stocks go up. In addition, lots of less smart and less hardworking people are also working to make stocks go up. In contrast, very few people are trying to make stocks go down.
While there are shortsellers, they are generally not trying to make stocks go down, i.e. by destroying value. Instead, shortsellers are simply saying that some companies are overvalued, and time and effort is better spent on other companies.
What do I mean by “make stocks go up”? I mean it in a fundamental sense: employees are trying to create value by making products better or adding new markets. Their rewards include stock compensation, bonuses, and promotions, so they are indeed incentivized to create value in whatever way possible. Meanwhile, financiers are trying to allocate capital (an abstract representation of time, effort, and value) in the best way, by optimizing society’s effort. These people are also rewarded with capital gains, bonuses, and promotions.
Given that there is so much effort and incentive to fundamentally increase the value of stocks, why should the market stay flat or neutral? I’m sure someone can try to find some elaborate corner case why this isn’t true, but mostly the reasons stocks wouldn’t go up is if no one is trying (no incentive) or if someone is trying to destroy asset value (expropriation, violent revolution, etc.). If people are trying to build stuff that makes stock prices go up, and there isn’t much effort to destroy them, it’s pretty straightforward that they go up.
For what it’s worth, this is basically Buffett’s view. Also note, the comments about equity risk premium, valuation puzzles, and the efficient market hypothesis miss the point: that’s only a matter of relative returns, not absolute returns. (If your question is about beating the market, then those points are more relevant, but it’s not clear anyone can beat the market today in developed economies outside narrow pockets of inefficiency.) As long as you can build new stuff, you’ll have a reason to invest, which demands a return, hence the positive returns we see. If there’s less “stuff” to build, you can expect lower prospective returns because capital competes for each opportunity, resulting in lower rates and a huge premium on growth opportunities, which is what we observe today.
One last way to think about it is in real terms. If you have a machine that can build more of itself, you will have more of those machines over time, which is a real return.