In this Rule Breaker segment, Motley Fool co-founder David Gardner shifts the focus away from the numbers game to a mental one. Picking good investments is, after all, only one part of growing your wealth -- another key aspect is maintaining the disciplined mindset and emotional distance required to avoid making the wrong moves. Here, he goes back to one of his favorite pieces of advice -- or perhaps a market truism. And it's one that holds something of a contradiction in it.
A full transcript follows the video.
This video was recorded on June 14, 2017.
David Gardner: The stock market always goes down faster than it goes up, but it always goes up more than it goes down. I'm going to say it again. The stock market always goes down faster than it goes up, but it always goes up more than it goes down.
Now when I've mentioned this line in the past, I've often channeled my inner F. Scott Fitzgerald, and I'm going to do it again here, because one of Fitzgerald's memorable quotes ... a beautiful writer ... this is not from The Great Gatsby; I believe this is included in one his short stories that I didn't read. But if you just Google "Fitzgerald quotes" this will always come up prominently, and here it is: "The test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time, and still retain the ability to function."
In fact, because I didn't want to be too lazy or sloppy on this podcast, I'll just let you know it is from The Crack-Up, which was a collection of essays that Fitzgerald wrote and published in 1945. That's where that particular quote comes from.
The reason I think that that's a great quote is because that's what we need to do as investors. Here are two things that are really great to keep in mind around any stock you're investing in -- the bull case and the bear case. The strengths and the weaknesses. Some people only see one of those.
Some people only see the strengths. They don't like it if somebody suggests they may have missed something. They don't like to go on a discussion board and hear somebody who's a bear talk down that stock. They only see the positives.
Other people have the opposite problem. They can't find anything that they like enough about a great company. They just see it's overvalued, or they don't believe the CEO has staying power -- whatever it is. And sometimes we miss some of the great companies of our times because we don't see the positives. But the test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time, and still retain the ability to function. Or, in this case, I'll say the ability to invest, to invest well, to hold over time that which deserves to be held.
"The stock market always goes down faster than it goes up." Let's parse this line briefly. So I don't have any scientific proof of this. My second part of this line I will present scientific proof of, but this one, I don't.
However, based on my experience -- and perhaps you'd agree with me based on yours, too -- I watch things drop faster than they go up. I've watched the Nasdaq lose over 80% of its value inside of 18 months. I've never seen the Nasdaq gain over 80% in 18 months. I've watched the S&P 500 -- you have too, if you've been around the last 10 or 20 years -- get cut in half in a single year. I can't remember a time that the S&P 500 went up 50% or more in a single year. And that's just the overall market dynamics.
I suspect, by the way, if you go back -- if anybody wants to be a market historian or go to a database -- I suspect you're going to find that the drops that the market makes typically are larger drops in a single year than the gains the market makes. But whether or not that's true, I think most of us don't care as much about the market. We care about our individual stocks. And here again, I've often watched a company come out with bad earnings and get cut in half, sometimes, overnight. Rarely would I ever see that stock -- or many stocks, frankly -- go up 50% in a day.
When does that happen? Well, it happens if a company gets bought out, sometimes, at a premium; a stock might jump that much. Or if it's a biotech company and it gets FDA approval, you might see a huge move like that. But most of the time, unscientifically, admittedly -- I bet you agree with me -- I watch the drops happen faster than the ups. So that's that part of the line; we've parsed that.
The second part is "but the market always goes up more than it goes down," and that one's pretty easy to prove. Just look at a graph of the Dow Jones Industrial Average or the S&P 500 over time, and you will quickly see that, indeed, the market does go up more than it goes down. And the simple math of it is that on average, as we know, the market rises about 10% annualized over the years. Now certainly, in any given year, we know the market could drop 35% or go up 20%, but taken all in all, something that rises 10% on average from one year to the next: Yeah, that does "always go up more than it goes down."
First off, I hope that's comforting, because if you were like me, you watched your stocks lose value very quickly in just a couple of days in the past week, and if you're new to this, or if you have a lot riding on it, or you're right near retirement, you felt some stress, maybe more stress than you were expecting from that. But I hope my quotation lets you know that that's the way it works. That's the way things have always worked.