stock market cannot always go up

Why the Stock Market Cannot Always Go Up

Financial Education, Markets, Thoughts of a Mastermind 17 Comments

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“The stock market always goes up! It’s a sure thing! There’s 90 years of data backing me up, and look, just in 2008 when it seemed all was lost, the stock market came roaring back! The stock market is always up and to the right!”

I want to throw up.

Here’s the only issue with saying the stock market will always trend up: the earth is a closed system. 

I could end the post there, but that’s not interesting, productive, or informative for you to understand the underlying and fundamental reasons of how my statement proves why the stock market cannot always go up.

Saying the stock market will always go up ignores physics and biology. It’s not too difficult to reason the conclusion when presented with the following case, but I’m sure there will be push back 🙂

In this post, I’m going to be sharing with you why the stock market cannot always go up.

What My Argument is Not About

First, I need to clarify what I’m talking about when I say “the stock market cannot always go up.”

Here’s a simple picture to visually explain what I have an issue with: (picture of the stock market always going up)

stock market goes up over time

My problem is the comment that it assumes infinite growth in a finite system.

I have no problem with the argument, “the stock market will always come back to its previous high, and possibly go above that previous high, because humans are resilient and will come up with better technology” because this is true. Over time, technology does improve, processes become more efficient, and businesses become more profitable (in a capitalist society).

However, this statement is a completely different picture:stock market doesn't go up over time

I have no problem with this picture and the statement behind this picture. A boom followed by a bust, followed by a boom, is nature.

I have no problem with investing in the stock market, and have a fair amount of my net worth in equities and index funds.

It’s the first picture here, which has infinite growth baked into it that gets my blood boiling.

The Problem with Infinite Growth

stock market cannot always go upThe statement, “The stock market always goes up” assumes infinite growth.

Saying, I’m at $200,000 in investments today, and in 30 years, I’ll have $2,000,000 assuming 10% growth is an exercise in absurdity. (While yes, it’s possible that with wonky money printing techniques we will all be millionaires and billionaires, what do you think the dollar will actually be worth?)

Here’s the thing with infinite growth of stock market trends: it assumes a number of things which are not consistent with what we experience on a day to day basis here on Earth.

What do I mean?

First, let’s remember why stocks have value. A stock has value ONLY because the underlying company is PROFITABLE and PRODUCTIVE.

To be profitable and productive, that company needs to use energy and other materials to produce value. There are a number of finite inputs to this process (seemingly ignored by economists).

First, energy is finite. Second, the materials are finite. Third, the customers are finite. To assume infinite growth is to assume one of these is infinite.

It’s that simple, but I need to say a few more things.

Your Data Driven Argument is Flawed

Again, I need to make this point: I think equities are a solid investment in most economic environments. In a growing economy, by definition, the stock market will go up.

Over the last 100 years, the United States stock market has trended upward and has stayed up:

dow jones over time

I’m going to make the joke again… is that the chart of Bitcoin?

The United States has had the world’s number one economy for the last 50 years, so yes, the economic growth of the general stock market should be up and to the right.

What’s interesting though, to say, “In the future, I’m going to project economic growth at 7-10% annually” is to mistakenly go against one of the fundamental pieces of statistics and econometrics: past performance doesn’t guarantee future results.

To say “the stock market always trends up”, is to make this mistake.

In addition, this ignores many of the limits which we talked about in the previous section, namely customer base, materials, and energy.

These cannot be ignored as money is a claim on energy, and debt is a future claim on energy.

Again, it’s a systemic issue rather than a financial issue. The economy is a subset of the environment (the Earth), not the other way around.

An Example of Growth Gone Wrong: Cancer

We all know about unrestrained and infinite growth in a finite system gone wrong – its name is cancer. Unfortunately, there are many things that cause it, and doctor’s haven’t quite found a cure for it.

Cancer happens when certain cells go rogue and stop functioning the way they are supposed to:

  • Normal cells know when to stop growing; cancer cells grow with abandon with no regard to the space around them.
  • Normal cells kill themselves when their duties are done, a process called apoptosis; cancer cells ignore signals to die and, without treatment, may divide indefinitely and become virtually immortal.
  • Normal cells communicate to help their host survive and thrive; cancer cells communicate only to deceive the body’s defenses.

If not treated (and even if it is treated), these rogue cells can overtake the human body and can lead to death.

I hate that I just had to write that sentence, and I hate that this is an example on my blog, but the point is true: infinite growth in a finite body is NOT sustainable.

A Case Study of Wall Street Analysts Not Understanding Biology and Physics from 7/25/2018: Facebook

In July 2018, the market had quite the shock. After hours, Facebook had their 2nd quarter earnings call and talked about headwinds for future financial performance.

Facebook’s stock dropped 23%. Factors leading to this were a number of things, but most prominently was a comment about how user growth had slowed.

facebooks users over timeThere are two things which are funny here:

First, 44 of 48 market analysts had Facebook rated a buy for recommendation.

Second, I don’t see how the “slowing user growth” narrative wasn’t sniffed out earlier looking at the above chart. (Oh wait, Mark Zuckerberg made that comment 3 months ago) Maybe those analysts should read my blog, because they obviously are ignoring one of the fundamental pieces to biology and population growth: carrying capacity.

There are only 7 billion people on this Earth, and about half of those people don’t have internet.

Population growth, user growth, really any growth in a finite system follows the following shape:

population growth picture

It’s not rocket science. But for whatever reason, in the name of infinite growth, it’s ignored time and time again.

How to Think About the Stock Market

At this point, maybe you agree with my argument now, and maybe you don’t.

The goal of my work here on The Mastermind Within is to inspire new thoughts and perspectives to challenge you and help you become better in your life.

If I can succeed in doing that then I’m happy.

Let’s change the perspective I’d ask you to view this post through here and shift it to one of sustainability.

Here’s what I want you to take away from this post:

  1. When using statistical arguments, look to understand the underlying assumptions and consequences of those assumptions to ensure your argument is sound
  2. Look to promote sustainability (and work to become more sustainable in your ways) where possible, and understand that there are limits to our world (there are limits we need to acknowledge unfortunately even if we live with an abundance mindset)
  3. Realize things can be different than they appear. We all come from different perspectives and experiences, and have different biases and opinions. I’m not an expert and could be completely wrong here. At the end of the day though, I’m challenging myself and hopefully challenging you.
  4. Challenge yourself on your portfolio and asset allocation. It’s okay (and probably a good thing) to own a basket of assets and become more financially resilient.

Concluding Thoughts on the Stock Market

I’m going to get some heat for this one, but I don’t really care. The conclusion is obvious when you dive in and think about it.

I’ve been searching for the truth – looking inward to who I am as a person, looking outward to examine the world around me, and drawing conclusions based on my observations.

I’m not an expert. I’m not a guru or a financial expert. The only thing I know is that I know nothing at all. Being eternally curious is how the mind grows. I’ve been all over the map and learned a ton from writing this series. I hope you have as well through reading it.

Here’s the thing: we live in a closed, finite system. The Earth has limited carrying capacity. There is no infinity here on Earth. It’s physics. It’s biology. These points can’t be ignored. The stock market cannot always go up.

WHY THE STOCK MARKET CANNOT ALWAYS GO UP

About the Author

Hi! I'm Erik, the creator of The Mastermind Within blog.

I'm passionate about helping you improve as a person, get better with your finances, and create your dream life over time.

Through setting goals, critical thinking and intentional living and action, I believe you can master your life, win with money, and get on the path to freedom.

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Comments 17

  1. I’m not entirely in agreement since at least at a high level I don’t agree earth is a closed system. Solar energy, mining asteroids, and solar expiration all mean potentially infinite improvement. As does technology itself. Imagine what we can do 100 years from now. Then realize 100 years ago none of what you have now was even conceivable. Frightening in a way. But in essence the economy is just a proxy measurement for the quality of life, and that’s ever expanding and improving.

    I believe there might be an end to innovation some day, sort of a dark ages repeat where society evolves into something else. The possibilities and impacts of that particular outcome though go so far beyond the market as to require books of analysis.

    But I believe your point is really not about the world and infinite possibilities after reading all your posts this month. I read your posts as a fear about the future of the US in something akin to Japan due to rapidly increasing markets and money supply. If I think specifically about the US economy then I agree there are real fears that it may stagnate, even for a long time. The economy is only as stable as the rules that govern it and the people that work in it. What that means for the US is not something my crystal ball can predict.

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      Author

      Thank you for stopping by FTF, and thank you very much for this whole month. At the end of the day, this is a more or less a challenge to many personal finance practionors who blindly apply ridiculous growth assumptions in their “FI plan”.

      A Japan like scenario is probably what it will look like, though every time its different. With a bigger and more diverse population, I’m a little scared the effects could be worse to the downside.

      Im going to wrap up this series on Monday with a more inclusive call to action. Sustainability, rational thought and a focus on protection are my main points but there’s a little bit more to it than that.

      Thanks again for stopping by and enjoy your weekend

  2. Wait what did you say? LOL

    I’m kidding, i’m kidding… you definitely have some valid points here, i just think it’s something most people do not want to hear. Which is sad…. it should at least be considered.

    I can’t wait to rebut this tomorrow lol… ok, again i’m kidding, but i will be siting this article tomorrow… well as soon as i actually finish writing mine 😉

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      Author
  3. Pingback: Red Teaming FI: If this Whole FIRE Thing is a Lie - Half Life Theory

  4. I love the idea of challenging the assumptions we make on wealth projections. What I would argue is that although the Earth and population and energy are all ultimately finite, we are no where near challenging these inputs and won’t challenge them for several centuries, if not millennia.

    The first thing that got me interested in personal finance was one of these projection charts that I made in my 10th grade econ class. I had projections based on 8%, 10%, and 12% returns, seeing what would happen to a small investment over 50 years inspired me to start saving at an early age. Today I have my projections based on 7% returns, which may still be on the optimistic side.

    What drives me crazy is that when your average Joe hears about the stock market not sustaining this type of growth over the long run he sees it as a reason to not invest at all, when lower returns should inspire the opposite action.

    Thank you for challenging assumptions and instigating critical thinking, great article!

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      Author

      How do you know we are no where near challenging these inputs? Is that being a little over confident? I’m not attacking you personally, just challenging these thoughts. I don’t have a crystal ball, but at the end of the day, also, don’t want all my eggs in the infinity basket.

      You bring up a great point and one that is important: my argument is not that the stock market is a bad investment. It’s a good investment and like you said, even with lower returns, that’s fine. It’s more about the rational thought of thinking critically about where your money is going rather than just blindly throwing it into index funds.

  5. Great post and points but I think at some point you just have to pick a spot and put up your tent.
    If you add in all the possible variables on what could happen you would never retire. You don’t want to be the librarian that never retired never took vacation and died with millions of dollars in the bank!

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      Thanks Brian for the comment and yeah definitely. It’s not rational to think and think and think and never DO. It’s tough and complex 🙂

  6. So what your saying is we need to go to Mars?

    In theory, though, the stock market could always go up without infinite growth – it’s just that the growth would have to slow down over time (think Zeno’s paradox). Of course, when people say “the stock market always goes up” they’re not thinking of growth slowing down (in fact, they’re probably thinking the opposite, especially when it comes to compound interest, where growth speeds up exponentially).

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      Author

      You hit it on the head and again, the argument is not that companies will stop being productive or stocks are a bad investment. It’s that growth in a closed system follows a logistic curve vs. an exponential curve 🙂

  7. We should always challenge things taken for gospel, it’s good for the community! After learning about FI the first book I read cover to cover was Simple Path to Wealth and this is certainly JL’s refrain. The way I took his advice was basically, investing in low-cost passive index funds is a simple and effective way to grow wealth over a long time period as long as you weather the valleys. With dividends reinvested, you’ll be growing even during downturns (and presumably, buying more). One thing I do in all my projections is use extremely “conservative” rates, so like for example right now I use a 4% return versus some of the higher rates you see on FI blogs (7-11%).

    Currently with a mortgage and kids, I don’t put 100% of my extra earnings into equities. This is my risk tolerance–I want to make sure I do have at least some chunk of change on-hand to liquidate if needed (or for building up savings to spend the next year). I also max out Roth’s as a secondary EF. I basically accumulate savings into my MM account, using a fixed auto-investment (a small percentage) and then when the balance grows until it reaches a threshold, I dump the rest over into my holdings.

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      Hi KR! Thank you for the comment.

      Investing is so interesting because there are so many different options and alternatives.

      Low-cost index funds are fantastic investment options, but I just hate how people think they are the one-stop shop and God’s gift to the FIRE community. I think a lot of people are going to be disappointed in the coming years.

      Regarding cash, totally think that’s a great thing to have on-hand 🙂

  8. Interesting article but I don’t agree completely :). Even in an economy that stops growing it is still possible for the stock market to go up. I think you are talking about earnings that can’t grow indefinitely instead of the stock market. It all depends on the price you pay for your stocks. If you buy them with a PE of 10 you can still earn a satisfactory return even though earnings don’t grow and the stock market can continue to trend higher thanks to buybacks. If you buy them with a PE of 100 and earnings don’t grow… not so much or at least you’ll have to be really patient (hello Japan).

    A few other points:
    – services and software are taking a bigger and bigger part of the economy. They don’t have the same problem of being a finite resource like tangible materials.
    – energy could be limitless: yes, fossil fuels will run out at some point but solar energy, nuclear power plants, other technologies that still have to be developed can easily take its place.
    – even if your customer base doesn’t grow anymore, customers can get wealthier and buy more of your products
    – even though far fetched at the moment, we could start colonizing other plants when our technology gets advanced enough to do so

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      Author

      Hi PC, thanks for the response!

      I don’t agree completely with your points and appreciate the discussion and challenge! 🙂

      – Services and software still require energy – people need food to eat, which requires agriculture and production. So this isn’t entirely a case for bullishness long term.

      – For energy, one of my favorite blogs is by Gail Tverberg – an actuary who looks at oil and energy, and bigger picture effects. https://ourfiniteworld.com/2019/04/09/the-true-feasibility-of-moving-away-from-fossil-fuels/

      I do agree with you that moving to other technologies will be essential, but to build that up WILL take a lot of time and energy. We won’t be able to go to it overnight if a crisis happens.

      It’s really interesting – I love thinking about this. I could be very wrong as well (and that’s okay 🙂 )

      1. Indeed, we can never be sure of what happens in the future. I am optimistic though. Nuclear energy is a relatively clean energy source (at least a lot cleaner than fossil fuels) which is really promising if/when nuclear fusion becomes a reality. In any case, I think humans are ingenious enough to solve the energy problem in the future.

        We still have time to find a solution, existing fossil fuel and uranium reserves can last us decades, if not hundreds of years.

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          Author

          I have no doubt that humans will be able to solve the problem of energy.

          The problem I see is that the current form of humanity and the trend of adding millions of people each year to the Earth is unsustainable.

          Yes, nuclear energy or any other form of alternative energy CAN work – but scale is very important. These forms can amazing at a small level (i.e. electricity), but the interesting piece is thinking about transportation.

          Also, solar, air, and water cannot power trucks and ship carriers to facilitate the trade we need unless there is some serious innovation.

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