A Case for Investing with Confidence

I come from a country that if you invested £10,000 in 2004 you would end up with £681 after 16 years time. Believe it or not, it gets worse before 2000.

A picture is a thousand words:

So much for “long-term investing”. Sometimes the harsh reality of RISK in equities punches you right in the face as MMM would put it.

Naturally, most Greek people I know lost money in the stock market, especially the older generation. That’s partly because everyone invested during the tech-boom hype and more importantly because they invested only in their own country – a.k.a. home bias.

As a result, when I talk about investments with my Greek friends, they either think it’s extremely risky (judging from their own experience) or they don’t have any money left to invest due to the economic disaster the country is going through in the recent years.

This gets me thinking. What if this happens to another country too? I don’t want to scare you but personally, a good chunk of my wealth is in the UK.

Now obviously, the UK is a much stronger economy than its emerging counterpart. But bear in mind, Greece was considered a developed country until 2013. It became the first developed country to be downgraded to emerging by MSCI during 2013. Oscar-winner really!

Today I want to present some facts about the world that will boost our confidence as investors. When I invest, I want to be almost certain that I will not be losing my entire life savings.

In 2019, I read a book on world statistics, called Factfulness. Although the book has nothing to do with investments I believe these stats are directly related to a brighter investment future. And I’ll explain why below.

The world is improving by most metrics.

And regardless of the stock market, the world getting better is a wonderful thing.

Extreme poverty has almost halved over the past 20 years. Halved! That’s 3.5 billion people starting to use products and services, mobile phones and the internet.

Girls that attend primary school in low-income countries is now the highest it has ever been: Higher than 60%. And the number keeps increasing. War deaths are dropping dramatically compared to the past. Share of people with mobile phone and internet. Share of 1-year old with at least one vaccination.

Hunger (share of people starving) is now 11% compared to 28% in 1970. There are more scientific papers published per year. The share of humanity living in a democracy has now risen to 56%.

All these people moving from extreme poverty to middle-class will have an impact. They will want to use a computer, to own a mobile phone plan, access internet services, buy consumer goods and musical instruments.

Speaking of people entering middle class, I recently read China’s internet population reached 829 million people, a penetration of only 59.6%. The U.S. internet population reached 287 million people, a penetration rate of 88.5%.
Source: CNNIC 43th Report (Abstract)

One more educated person alive is one person that will use the next motorcycle, will buy books, work and contribute to their country’s GDP and purchase life insurance.

And as for us in the more developed nations, we fear about the next stock market dip without looking at the underlying powers that created it. Consumer demand, innovating businesses and economic growth improving day by day.

When hearing the word “stock market”, even after so many books the imminent emotion is fear. Why is that? I believe it’s because we have connected the phrase with related words such as “crash”, “uncertainty”, “lost millions”, “wiped off savings” etc.

Here’s a better way to look at the “stock market”. As my mate Andy from Maven Money says, The great companies of the world.

Apple, BP, Nestle, Microsoft, Amazon, Tesco, Legal and General, Coca-cola, Barclays, Toyota, and many many more we haven’t heard of.

Isn’t this more familiar now? If I tell you we don’t invest in GDP growth, PE ratios, historical returns and government lending. But instead, we invest in companies that we all use every day and in things we understand?

And say a stock correction comes and our portfolio is 40% down.

People will keep eating Hellman’s mayo (Unilever), wash with Tide (P&G), shave with Gillette (P&G), drink Nescafe (Nestle) and Coke (Coca-Cola), brush their teeth with Crest (Johnson & Johnson) and feed their pets (Felix and Purina, Nestle).

And they’re going to do so by shopping from Tesco, Sainsbury’s, Lidl, Waitrose and real companies around the corner. And I’m not talking only about consumer staples – i.e. companies that are non-cyclical because people need to buy food and toilet paper regardless of how the economy performs.

People will still buy life insurances, get mortgages to buy a house, use banks to get a loan and pay their gas & electricity. The world keeps moving regardless of whether the stock market decided it’s time to halt.

Companies will keep innovating because more people want to do good every day than those wanting to do bad. Human ingenuity is an amazing machine and the productivity growth goes up. Sure as Klement says, we’re not spending enough on R&D and the returns on productivity which drives investment returns are not that high anymore (Stanford paper). Maybe future growth is and will be lower but I’m not willing to bet against it.

But don’t expect to hear all that in the news. That doesn’t sell advertising nor pageviews either. I would probably generate a lot more pageviews if I predict that the stock market will crash until 2021 because the valuations are high. An article like this one, on the other hand, is boring. It’s boring like how your investments should be. Small progress every day, 0.6% a month for 20 years.

As Michael Batnick says, bad news travel faster, gradual improvements don’t. Matt Ridley claims we just had the best decade in human history.

I’m not trying to paint a rosy picture here. I know I sound like an optimist. But on the contrary! Because things are getting better it doesn’t mean that our world is perfect. Climate change, Australian fires, tensions between countries, water shortage, coronaviruses and limited planet resources make it look like our world is not in good shape. And it’s true. We still have lots of room for improvement.

But we have to notice the improvement. Our world is like a patient in the ICU in very bad shape being closely monitored. Heart rate, blood pressure and lots of pain. How’s the patient? Very bad. After a week of care, we ask the same question again. How’s the patient? All the metrics are slightly improving. Does that mean that the patient is ready to exit the hospital? No, god no. It doesn’t mean we think it’s all fine. But there’s an improvement and despite being in a bad shape, it’s better than yesterday.

When I’m in doubt I look at cold hard facts. And cold hard facts now tell me the world is bad but keeps improving.

So let’s be realistic about what the 5 billion people in the world who still wash their clothes by hand are hoping for and what they will do everything they can to achieve. Expecting them to voluntarily slow down their economic growth is absolutely unrealistic. They want washing machines, electric lights, decent sewage systems, a fridge to store food, glasses if they have poor eyesight, insulin if they have diabetes, and transport to go on vacation with their families just as much as you and I do.

Factfulness book

To draw parallels with the stock market again, emerging markets have room to grow, but this doesn’t mean investing in EM is the way to go. Keep being diversified because believe it or not, it’s developed market’s companies who still make a good chunk of their money in emerging markets. Here’s the revenue breakdown of the top 10 European companies.

The world is getting better and that’s a great thing. Maybe future growth will be lower but I’m not willing to bet against it. Are you?