Most Baby Boomers and many younger generations know that The Greatest Show on Earth refers to the exciting and dazzling Ringling Brothers and Barnum & Bailey Circus, which has been entertaining audiences since 1871 and is still touring the world, with periodic breaks. As thrilling as that show is, it takes a back seat to a less exciting, but greater performance called the equity markets, which has been creating wealth long before Ringling, Barnam & Bailey started selling tickets.
What we know today as the publicly-traded equity market became formally organized in 1791 when the New York Stock Exchange (NYSE) was founded with the signing of a document called the Buttonwood Agreement between 24 stockbrokers trying to bring order to the securities business. They previously would meet underneath a buttonwood tree outside of 68 Wall Street in New York City to trade shares and later moved operations indoors. Over the past 234 years, investors have been able to buy shares in companies that offered ownership to the general public. They could invest directly in companies through IPOs (Initial Public Offerings), or in secondary offerings when an already publicly-traded company would offer more shares for sale, or more importantly, investors could buy and sell shares among each other.
Because companies need capital to grow, they sometimes sell portions of their stock (equity) to investors to obtain that capital. They also sometimes borrow money through the issuance of debt securities called bonds. When a privately-held company sells stock to the public, it becomes a public company and its shares are listed (traded) on stock exchanges such as the NYSE, (the world’s largest), the NASDAQ (National Association of Securities Dealers Automated Quotations, and second largest), or the London Exchange, as examples. Stocks and bonds are referred to as securities and can be traded among investors, offering an easy method of acquisition for the buyer and instant liquidity to the seller.
This instant liquidity feature is one of the greatest attributes of a security and is an often-underappreciated benefit of common stock ownership. Anyone who owns shares in publicly-traded companies can usually sell their shares for their full market value, Monday through Friday, during normal trading hours. There is no other growth-related asset class that allows someone to liquidate their holdings instantly at its current market value, with no penalty. Can you imagine owning real estate, or a privately-held business and needing to sell it today? Not tomorrow, not next week, or next month, but today. The only way you could make that happen is to discount the price so substantially that someone would buy it immediately and close the transaction within 24 hours. Even at a discounted price, you may not be able to find a buyer on that short notice. But with publicly-traded securities, you know every day what your holdings are worth and if you wanted to sell, you should receive your proceeds on the next business day. What a great deal, and just one part of the Greatest Show on Earth.
When thinking about the purpose of investing, it is usually funding major goals in your life such as educating your children and grandchildren, buying a home, providing for elderly parents, retiring with dignity, giving back to causes important to you, and leaving a meaningful legacy. Most of your goals will need funding at some point in the future or, if you are already retired, now and in the future. Because the cost of goods and services will continue to rise over time, the dollars required to fund your goals will need to grow at a rate greater than taxes and inflation. This is what we call a real rate of return.
Ownership in common stocks has historically been one of the most effective inflation hedges, delivering a return greater than taxes and inflation over time. That’s because companies benefit from rising prices since they are the entities raising prices, and the shareholders (investors) benefit as companies’ revenue, earnings, dividends and share values typically increase through time. No one likes rising prices, but if you own shares of these companies, you can maintain a leg up on inflation and taxes. If you own shares in Exxon, the price at the pump doesn’t seem so daunting any longer. However, extremely risk-averse investors will find it difficult to maintain purchasing parity through fixed-income investments alone and face the unpleasant reality that their dollars will buy less and less goods and services as time progresses.
But instant liquidity and real rates of return are not the only reason equities are the Greatest Show on Earth. What about quality of your investments? If you think about it, the publicly-traded companies in existence today represent the greatest collection of companies that have ever existed in the history of the world. When our forefathers founded the United States along with our free-market, capitalistic society, they unleashed the unlimited power of human ingenuity through which any man or woman could rise to whatever height their intellect, work-ethic and creativity would enable. Our country is not perfect, but it is constantly improving, affording anyone the opportunity to achieve the great American dream.
Through survival of the fittest corporate evolution, today’s public companies are the most creative, adaptable, and successful collection of companies that ever existed. They are constantly meeting the ever-changing demands of the world’s consumers through state-of-the-art products and services. Through the publicly traded equity markets that began in 1791, anyone with a few dollars can participate in this great experiment of wealth creation. You don’t even need to possess the intellect, creativity, drive or work-ethic of the people running these great companies to benefit. All you need is patience and a willingness to allow them to create wealth for you. In other words, invest, then sit back, relax and enjoy the Greatest Show on Earth!