Imagine you are in your early twenties. You are fresh out of university and broke. You are caught up in a pandemic that is unlikely to harm you but has shut down your social life and the chance of finding a decent job. You are trying to avoid looking in estate agents’ windows at poky little flats for half a million quid. That is my kids’ reality. Yes, I’d be cross too.
Now imagine that you have grown up in a world where you have been exposed day and night since you were a child to social media apps expressly, and cynically, designed to trigger your primitive quick-thinking, emotional brain, preying on your natural desire for instant gratification, the dopamine rush of followers, shares and likes.
Put these two together, throw in a year of boredom (and if you live in the US a substantial cheque from uncle Joe), and we shouldn’t be surprised that the GameStop mania sparked back into life again last week or that my son’s friend stopped his car to ask me some well-informed questions about Bitcoin. If the prospect of a home and a comfortable life seemed as preposterous to us as it does to our children, we’d be looking for a get-rich-quick scheme too.
A big problem with the stock market is that it can look, to young people in particular, like an easy path out of this terrible bind, while in reality it is just the opposite. The stock market is the ultimate get-rich-slow machine. It is the gift that keeps on giving if you treat it with patience and respect. Try and take advantage of it, though, and it can eat you up.
Just a couple of weeks ago, the GameStop story looked to have burned itself out. Having peaked at nearly US$500 a share, the Reddit/Robinhood crowd’s favourite was back below US$50. People who have lost a lot of money and feel foolish tend to keep quiet about it, but by definition some innocents abroad have taken a beating since January. That didn’t stop GameStop briefly touching US$330 again last week before yet again plunging. Like second marriages, it is a triumph of hope over experience.
The long-run performance of stock markets is indeed a wonder to behold, especially if you look, as everyone tends to because that’s where the case is best made, at the US. According to the Credit Suisse Global Investment Returns Yearbook that I mentioned last week and am still enjoying, a dollar invested in 1900 on Wall Street had grown to be worth US$69,754 dollars by the end of last year. Even if you account for inflation’s thirty-fold savaging of purchasing power over that 121-year period, you’d still have US$2,291 in 1900 money.
Even on this side of the pond, investing a pound in the UK stock market at the beginning of the 20th century would have given you £39,398, or £572 in real terms. Inflation has averaged 3.6pc over the last 121 years in the UK, which is only a bit worse than the 2.9pc in America, but even that small difference compounded over such a long period means that prices are 69 times higher in Britain today than they were in 1900.
The spectacular performance of shares over the very long term is the result of an apparently rather small difference in return compared with the risk-free (in nominal terms anyway) return from a bank deposit. Over the century and a bit since the end of the Victorian age, shares have delivered an excess return compared with cash of 4.4pc a year. That’s been enough to give stock market investors nearly 900 times more over the period than someone who left their cash in the bank.
The problem is, of course, that no-one actually does put their money into the stock market and leave it for 120 years. And the reason why shares offer investors a small but powerful performance premium over cash and bonds is that this rewards them for sometimes fairly extreme volatility along the way, which in turn encourages behaviour that further reduces the returns that most investors actually achieve. Not GameStop volatility, but some stomach-lurching turbulence nonetheless.
The shorter the time period you look at, the greater the volatility and the greater the risk that this great wealth-generating machine will leave you out of pocket. In the US, investors lost 80pc between September 1929 and June 1932. Here, the Opec oil squeeze in 1973/4 represented the nadir, with the All Share index down 70pc in real terms. German investors suffered a 65pc fall during the dot.com crash.
And recovery from big drops can be painfully protracted. Wall Street did not recover its 1929 peak until the final year of the Second World War. In our own market, investors did not recover the 1972 market level in inflation-adjusted terms until 1983. There is an oft-quoted statistic that there has not been a single period of 16 years or more in which a US investor would have failed to make money by tracking the market. But if you are newly graduated, that is quite literally a lifetime. It is not hard to see why the case for long-term investing is a hard-sell to young people today and a punt on GameStop seems such a good idea.
Unfortunately, the long slow grind of small incremental outperformance, compounded year after year, is the best hope for my children’s understandably aggrieved generation. And it is why my generation, and my industry, has a duty to explain these boring facts and not to join the social media companies in peddling the myth that you can have it all, and have it now.