Just when you least expect it… up, up and away for the ASX.
"Bargain hunting drives ASX higher," says the AFR, with today's broad-based gains putting yesterday's broad-based losses into the rear view mirror.
Who'd try to predict these things?
Not me. I was just as confident yesterday in the long-term prospects of the stock market as I am today. A little bit of stock market volatility 'aint going to scare me.
That said, for all the stock market ups and downs, over the past 12 months, the S&P/ASX 200 Index has gained just 1.66%.
Who was it who said term deposits were dead? Compared to a flat stock market, a 2% per annum no-risk return on your term deposits suddenly doesn't look too shabby.
Except that…
— That 1% stock market return over the past year doesn't include dividends. And it doesn't include franking credits. That'll boost your "in the pocket" returns by around 5%. In this low interest rate environment, that's a decent return.
— Interest rates are likely to stay low for years and years, maybe decades. Excluding dividends, term deposits may be ahead of the stock market this past year, but over the next five years, I'd be betting on the stock market to soundly out-perform cash.
Of course, five years is such a long time to wait, especially for people who have grown up having easy access to debt. Today, you don't have to wait to buy anything.
Flights to London? Bung it on the credit card and fly next week.
New BMW X3? Grab a personal loan and drive out the showroom this afternoon.
Want to get rich quick? Play the pokies, buy a lottery ticket, or pop down the local casino.
For the person with no savings, none of this ends well.
Sure, you'll have a blast in London, but courtesy of 20% interest rates on your credit card debt, the trip will cost you many times its initial price, and it will take you many many years to pay it off.
As soon as you drive that $70,000 BMW out of the showroom, it will immediately depreciate in value by 15%. Not the best start to an investment, huh? To rub salt into the wounds, you might think your neighbours will be impressed with your new car, but the reality is they couldn't give two hoots.
As for gambling, I don't need to tell you how that ends for almost everyone, savings or not.
In such an environment, no wonder so many people simply want to get rich quick.
Yet almost everyone who tries to get rich quick will fail.
Same goes for investing in the stock market.
Sure, everyone wants to find the next Fortescue Metals Group (ASX: FMG) when it was but a glint in Twiggy Forrest's eye, and way before it turned into a $16 billion behemoth. But the reality is most exploration-stage mining stocks are awful investments.
Sure, everyone hopes every single one of the stocks they buy will rise in value, preferably immediately. But the reality is even the very best stock pickers only get 6 out of 10 investments correct.
No one likes to lose money. Studies have shown the pain of losing money is three times greater than the joy of making money.
Such pain is why many investors fail.
They fail by selling out when the stock market goes through one of its inevitable bad patches. They sell at precisely the wrong moment.
A case in point? January this year. US stocks posted the worst 10-day start to a year in history.
"Many investors believe that the equity market volatility will not be subsiding anytime soon, and that even lower lows for the S&P 500 lie ahead," said Standard & Poor's analyst Sam Stovall in the Chicago Tribune.
Since its January lows, the S&P 500 has gained almost 19%. So much for Royal Bank of Scotland's call for investors to "sell everything."
Brexit. The ASX plunged 167 points on that fateful day in June this year.
"… suddenly there's a liquidity crunch and someone gets into trouble and that has flow-on effects like we saw in 2008," said Richard Holden, Professor of Economics at UNSW on The Conversation.
Since then, the S&P/ASX 200 Index has jumped 6.5% higher. So much for GFC II.
When you buy shares in a company, you are investing in a business. Over time, the success or not of your investment will ultimately depend on the success or not of the business.
Warren Buffett, the world's greatest investor, has said if you don't feel comfortable owning a stock for 10 years, you shouldn't own it for 10 minutes.
He has also said you should buy into a company because you want to own it, not because you want the stock price to go up.
In this "get rich quick" world, many people judge the success or not of their investments on the daily ups and downs of its share price.
By doing so, they are setting themselves up for failure.
They'll sell out just because the share price is falling, even if the business is going great guns.
They'll sell out too early, locking in a relatively modest profit, then miss out on the mammoth compounded gains that can come from holding a stock for 5, 10 and 20 years.
You've probably heard of Netflix. I'm one of the many millions of worldwide subscribers.
You may not know of Netflix (Nasdaq: NFLX) the stock.
It's up over 1,400% since our own Scott Phillips first introduced the company to his Motley Fool Share Advisor members back in August 2012.
To put a 1,400% gain in context, it turns a $10,000 investment into $150,000. Not a bad return in a little over four years.
Before we even started business here in Australia, Motley Fool co-founder David Gardner recommended subscribers to his US-based Motley Fool Stock Advisor service buy Netflix shares way back in 2004, at a time when the stock traded at a split adjusted price of $1.85.
Last week, Netflix's share price soared by $18.99 on one day alone. Total it up, and David scored a 926% gain on his original buy alert.
Some investors search their whole lives for a "10-bagger" return like this… And David's buy alert did it in a single day!
The amount of doom and gloom peddled from commentators and pundits feels like it's at record high levels. Bad news sells.
Recession ahead? Probably not. Here in Australia, we last had one 25 years ago. The economy is ticking over, the Aussie dollar is riding relatively high, and inflation is low, as is unemployment.
Stock market crash ahead? Probably not. They come along when optimism abounds, the stock market is at a record high, and when you are getting speculative share tips from cab drivers and at backyard BBQs.
Solid returns from the stock market over the next 5 years, and more? Almost certainly. And, they'll be a lot more solid the longer you hold, a Netflix "10-bagger-in-a-day" or not.
