Why I Love the Stock Market

A large portion of my waking hours are spent thinking about investing. And that’s just as well because I thoroughly enjoy it.

I love reading about investing, keeping tabs on other successful investors, and practicing the craft myself.

While most of my energy is devoted to keeping up with stock and bond markets, as an investor, I don’t limit myself to those two categories of investments. Private stock and farmland are also major components of my personal investment “portfolio.”

I try to keep up with crop prices and land prices. I relish opportunities when I get a chance to analyze financial statements of private businesses, even if they are not open for investment. It’s always fascinating.

But I must admit the stock market is my favorite asset class of them all. There are three reasons underpinning that preference.

First, anyone can participate. You don’t have to be part of a special class or have unique access to be an investor in the stock market.

The same is true for real estate, I suppose, but it simply takes too many dollars. While you can purchase shares of many publicly traded companies for less than $100, it takes thousands to get started in real estate. And if you’re looking at private company stock, it typically requires uncommon access to special situations – who you know is of paramount importance.

Not so for the stock market. I like that.

My second reason for focusing on the stock market is that you don’t have to be a genius to do well.

Warren Buffett, one of the most brilliant investors of all time, has repeatedly argued that average intelligence is all that is required. A couple of extra IQ points simply do not help. What’s far more important, Buffett suggests, is having the right temperament. You can’t get overly enthusiastic when the market is screaming higher, and you can’t get overly dejected when the market is falling like a rock. Runaway emotions can ruin your investment success.

To be fair, this second point probably applies to investing in any asset class. But because of my final reason below, it is especially applicable to investing in the stock market.

So let’s talk about the third reason why the stock market is my favorite asset class. And that’s because it offers up the most opportunities.

The stock market is not a casino. Far from it. It is based on two primary things: (1) Profits generated by companies, and (2) Emotions exhibited by investors. The reason the stock market goes up over time is that profits increase over time. The more companies make, the more valuable they are to investors. That’s pretty straightforward. As long as companies continue creating new and interesting products and services – at a profit – then stock market investors will continue to be rewarded.

It's the second factor, the emotions of investors, that makes the stock market truly captivating. Why? Because people can be crazy. Some contingent of the population allows themselves to succumb to wild swings of delight and dismay, largely based on prevailing stock market prices. As a result, these investors buy stocks at silly prices and sometimes sell them at even sillier ones. And that creates massive opportunities on occasion for those investors who can maintain their sanity.

Every five or 10 years, people think the world is coming to an end and indiscriminately sell their stock investments. The more the market drops in value the more willingly they sell their shares. But for every seller, there must be a buyer. Those investors who keep their heads while every one else is losing theirs are the ones who reap the rewards.

Private companies don’t have the liquidity to create these periods of instability. Land is too large of an investment – and the costs of buying and selling too great – to experience routine bouts of irrationality. But the stock market is different. It’s easy to buy and sell, and it’s inexpensive. Consequently, some investors – more appropriately, speculators – buy when they shouldn’t and sell when they shouldn’t, creating a chance to profit from their folly.

And it happens time and time again.

That’s why I love the stock market.