The Stock Market’s Long-term Resilience

Ron Baron founded Baron Capital in 1982, and today his firm manages over $50 billion of assets on behalf of clients, including many here at Madison. Ron has amassed a terrific track record throughout his career and is one of the most prolific long-term growth investors around. In the below excerpt from his quarterly report, Ron demonstrates the long-term resilience of the stock market, even in the midst of some powerful historic events. In environments like today, Madison continues to emphasize the importance of a long-term investment perspective, both domestically and abroad.

Baron Funds: December 2020 Quarterly Report by Ron Baron, CEO & Portfolio Manager at Baron Funds (Emphasis by Madison)

In the 20th century, the United States endured two world wars, and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions; financial panics; oil shocks; the 1918 Spanish flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”

                                                                                                                                                               ~Warren Buffett, Chairman, Berkshire Hathaway (March 2019)

“In his address to Berkshire Hathaway’s shareholders at their 1994 annual meeting, Buffett told the gathering, ‘I bought my first stock in April 1942 when I was 11. World War II didn’t look so good at the time. We were not doing well in the Pacific. Just think of all the things that have happened since. Atomic weapons and major wars. Presidents resigning, massive inflation at certain times.’

Buffett then explained why he believes investing in good businesses for the long term is a better idea than trying to continuously rebalance your portfolio based upon the current news cycle. ‘To give up what you’re doing well because of guesses about what’s going to happen in some macro way, just doesn’t make any sense to us.’  Of course, to adopt Buffett’s long-term strategy requires an unquenchable optimism, like his and ours, and a belief that it is ‘never a good time to bet against America’….which history has proven correct.

 In March 1999, the Dow Jones Industrial Average reached 10,000 for the first time. That was 12 months before the “internet bubble burst” beginning the Biblical seven lean years for investors. Further, since the start of the new Millennium, our nation has endured 9/11; the bursting of the internet bubble; the 2009 financial panic; a once-in-100-years pandemic that is presently claiming 4,000 American lives per day; and, an insurrectionist attack on Congress on January 6, 2021 that threatened our democracy.

Regardless, our economy and stock market have grown significantly since March 1999. The Dow Jones Industrial Average is now above 30,000. This represents a 6.61% annualized rate of return investors could have earned since December 1999 by hypothetically investing in a low fee, index fund that mirrors the S&P 500 Index. $10,000 hypothetically invested in such an index fund then would now be worth more than $38,000! This is despite returns in this period below historic 10% annual rates of return on U.S. equity investments since World War II. Further, those 6.61% annualized passive returns were far better than the returns that most pension funds, endowments, foundations, and institutional investors earned during the period despite their sophisticated investment strategies.

So, the question we think investors should ask is, ‘Why?’ Why have stocks done well amid turmoil? Why haven’t many of the “best and brightest” been able to match average benchmark returns?

Stock prices reflect the nominal growth rate of our economy discounted by the “risk-free return” provided by current interest rates. Furthermore, the impact of digitization on our economy means capital requirements for our nation’s businesses have been reduced, while technology offers businesses greater competitive advantages and opportunities to grow faster at lower costs. Interest rates below the rate of inflation are intended to make debt affordable and for it to decline as a percentage of our economy over the long term. Investment allocations and trading strategies do not change these economics. They just add costs. Finally, perhaps the most important reason asset allocating based upon news doesn’t work is that decisions based upon predicting what is unpredictable, even when you are right, still will not ensure that the companies’ stock prices haven’t already reflected those particular developments.

We believe the purchasing power of your money will continue to decline 50% every 17 years…about 3% to 4% per year! Growth stocks are a hedge that protects you against the loss of our currency’s purchasing power. To prove this, Google the prices of anything back in 1999 and compare them to present prices. Most prices have since about doubled! Stock prices of indexes are nearly three times what they were in 2000…and more than four times as much when you include dividends.”

Important Note: This material is for informational purposes only and is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product. The opinions expressed herein are those of the named advisors at the time written.  Actual economic or market events may turn out differently than as presented. © 2021 Madison Wealth Management