Assertion of the Mainstream: “Growth has its limits, and so has the stock market – high yields are a matter of the past.”
Why this is a flaw:
Growth has its limits in resources. While physical resources are limited, mental resources are not. While this may not be true for some people, it is true for humanity in its entirety.
In addition, humans have the desire to grow, in many ways. While this may not be true for some people, it is true for humanity in its entirety. This desire motivates people to compete, both with self and with one another.
For these two reasons, many people almost constantly come up with new ideas for cost reductions, improvements, innovations or inventions. Many of these improved or new products or services other people also want to have. Whether for themselves or for others, whether to satisfy physical, intellectual, or prestige needs.
All of this creates new value, because some people are willing to pay for it, and before there was nothing like it. They want the improved or new product or service in addition to what they already have. If they cannot get it as a gift, they want it in exchange for something they value less but others, for example you, value more. Nowadays, in most nations this means an exchange for money. Therefore, growth has NO limits.
Now, what about the stock markets and high yields? The history is full of assertions of putative “experts” and journalists who claimed: “This is the end. Stock prices will not go up again.” Or, “Stock prices will not go up any further.” Or, “It will never be as crazy as this again.” Nonetheless, of course they were always proven wrong.
Why is this? See above. Overall, mental resources and human desires are unlimited! Many people almost constantly come up with new ideas, products or services, for which other people are willing to pay.
But why do we often have this strong volatility on the stock markets? Does the creation of new value really proceed in such waves? No. The movement of stock prices is the result of economics and psychology. Long-term, stock prices follow pure economics, namely the value of the stocks. But short-term stock prices follow primarily psychology.
This insight has various implications, especially these:
1. When the mood of people changes, so do the stock prices. Nevertheless, the underlying economics, the value, may have remained the same.
2. Because it is so hard to understand the psychology of people, collectively even more than individually, it is so difficult to correctly anticipate the collective mood of investors (called market mood) and hence the next price movement of individual securities.
3. Because it is far easier to understand economics, of an individual business even more than of an entire economy, it is so much easier to make profitable long-term investments than to succeed with short-term investments or even Day-Trading.
Also note, when prices have gone down, ultimately the only direction is up. Stock prices do not fall below zero. Nonetheless, individual stocks of course can fall towards zero.
But why can’t the stock market fall to zero and stay there? See above. Because overall, mental resources and human desires are unlimited!
Moreover, the worse the economic situation got, the greater your desires will be. Not straight away at the level of zero because the less you have the more you are satisfied with a little bit more. But since from the level of zero there is so much scope to grow, over time you will want to have a lot more.
Therefore, the stock market cannot fall to zero and stay there. Moreover, the lower prices fell in the past the higher the yields will be in the future.
The space for this article is limited – for a more detailed explanation, including an example, go to Affluability.com. The example is mind-blowing: It discusses a clearly limited resource (crude oil) and reveals the marvel of economics.
Conclusion:
The assertion of the mainstream is plain wrong. It is one of the many flaws of the mainstream school of thought. Growth has no limits, the stock market has no limits, and high yields on the stock markets will continue.