The Single Greatest Threat to Your Stock Portfolio
Readers often ask how I can maintain an optimistic outlook on stocks in the face of a stagnant economy, high unemployment, over-leveraged consumers, currency troubles in the Eurozone and a looming fiscal crisis here at home.
In truth, I am only optimistic about the private sector – not the public one. Companies large and small battle each other every day to provide the highest quality goods and services, with the greatest speed, and at the lowest cost. We all benefit enormously from this.
But we face a serious longer-term threat to our future prosperity: an out-of-control public sector, not only in the United States but all around the globe.
Last week, for instance, I wrote about violence and riots in Greece and Spain. Citizens in these countries are being forced to confront the inevitable consequence of a) too much government spending and b) too much government interference in the economy.
Security Over Freedom and Prosperity
Yet voters keep choosing redistribution and security over freedom and prosperity. Hugo Chavez, for instance, just won his third presidential election in Venezuela. The country struggles with a soaring crime rate, a deteriorating electric grid, double-digit inflation, chronic shortages due to government meddling, and expropriation of successful businesses and ranches.
Yet the majority of voters are happy to return Chavez to office. Why? He has taken the country's enormous oil reserves (and confiscated property) and turned them into government subsidies for food, energy, housing, education and medical care. This strategy is a political winner in the short term and a guaranteed disaster over the long haul. Yet demagogues and self-interested voters don't care.
Even in the United States and Europe, too few voters understand the vital role capitalism plays in creating an affluent society.
Two hundred years ago, for example, 85% of the world's population lived on the equivalent of less than a dollar a day. Today less than 15% do. What is responsible for the enormous spike in material prosperity? Part of the credit goes to science and technology. But it took something more pedestrian to transform the world's standard of living: the profit motive.
This is hardly a bad thing. As Adam Smith wrote in The Wealth of Nations in 1776, "It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard for their own interest."
In addition to meeting virtually all our economic wants and needs, public and private companies develop employee job skills, build careers, support local communities, contribute to charitable organizations, pay billions in taxes and, of course, provide financial rewards for owners and shareholders.
Detractors will argue that capitalism is all about selfishness, greed and exploitation. Not so. Capitalism merely promises that you can have anything you want if you provide enough other people with what they want. It is not a zero-sum game where one side wins and the other side loses. Capitalism is a win-win.
Unlike government, business is about individual choice, not coercion. If you don't like a particular company or its policies, you don't have to work for them, sell to them or buy from them.
The majority of wealthy Americans achieved their affluence by starting and managing a profitable business. And while most of us don't have the time, the investment capital or the experience necessary to found and run a successful business, we can still own a piece of one through the quintessence of capitalism: the stock market.
A Stake in the World's Greatest Businesses
With even a modest amount of money, an individual can accumulate a stake in some of the world's greatest businesses. It's easy, in fact. A click of the mouse – and a seven-dollar commission – and you're in. Another click – another seven bucks – and you're out. (Compare that to your typical real estate closing.)
And owning a piece of a company is a whole lot simpler than running one. You don't have to borrow money or sign personal guarantees, hire or fire employees, grapple with an avalanche of federal mandates and regulations, pay lawyers and accountants, or even show up for work. How great is that?
Some Americans today obsess over the issue of fairness. But the stock market shines here, too. If I own shares of Microsoft, for example, my gain over the next year will be exactly the same as the nation's richest man, Bill Gates. Sure, he may own a few more shares than I do, but our percentage returns will be the same.
In short, over the past few hundred years, capitalism has vastly improved the quality of our lives. Yet most voters around the world still don't realize it… and are happy to elect politicians who demonize economic liberty and free markets.
Many free market advocates openly fret that economic freedom may only be compatible with the kind of prosperity the West has experienced over the last 60 years – and that a stagnant economy (or worse) will invariably lead to less economic freedoms.
This is not just the greatest threat to your stock portfolio but to your whole way of life. As Benjamin Franklin warned more than two centuries ago, "Those who would give up essential liberty to purchase a little temporary safety deserve neither Liberty nor Safety."
Spread the word.