The History of Stock Market Growth

Stock market growth is responsible for the residual income streams of generations of investors. Since 1926, despite a series of volatile ups and downs, the average annual total return on common stocks was 10.3%.

Indeed, many investors have felt that stock market growth is almost a certainty, and that it would be foolish not to see the long term potential.

The evidence seems to back up the investor exuberance:

According to Yahoo! Finance, only two decades since 1926-1936 have witnessed negative stock market returns (Yahoo! was looking at rolling decades, in other words, "1927-1937," "1928-1938," and so on). The best decade of stock market growth (1948-1958) witnessed a return of 20.1%. Nine decades witnessed stock market growth of less than 5%, but 16 witnessed average stock market returns of more than 15%.

I stay somewhat on the fence about the stock market growth trend – but I understand the merits of adding stock to a diversified investment portfolio so long as no one expects any fortunes to be made through dramatic price upswings.

The good news is that companies have as much of an incentive to keep their stock prices high as do investors.

The price of a stock impacts a company’s ability to qualify for credit and gives them bargaining leverage in any number of business arrangements.

Also, bond investors (if the company has any) may be able to get together and exert power over the company against the will of the top executives if the overall financial health of the company is put in question. A poor stock price could have that effect.

And then, of course, company executives who "steer the ship" are usually highly invested in the company's stock themselves -- when mortgage payments and college tuition come due, they don't want to find themselves selling their stock for low returns.

Like with any product or service, the prices of stock are established through the age-old economic vehicle of supply and demand – roughly speaking, the price is what a willing buying will pay a willing seller.

In an ideal world, a stock price would reflect the broadly available mix of information about the stock issuer and its securities.

However, I know from my professional experience that not all information that might affect the investing communities’ perception of a stock gets published. There are two reasons for this.

First Barrier to Information. There are many legal grey areas concerning what news a public company is required to disclose to the public, and when. Companies with savvy securities lawyers take full advantage of these ambiguities, especially when they are fearful that a news flash might cause their stock price to drop at a bad time.

Second Barrier to Information. In The Big Investment Lie, Michael Edesess PhD discusses the problem of scientism: the popular belief that principles of natural science describe the behavior of stock markets.

Lawyers and investment advisers promote the theory that stock pricing is centralized in stock markets and absorbs all of the news about the issuing company.

But the reality is that humans don't communicate that fast, and sometimes don't communicate at all. To the contrary, information that might impact a stock’s price is dispersed all over the globe in local interactions between people with local knowledge.

Michael Edesess has revealed that there is no one place that is getting all of that information in real time for it to be absorbed into a stock’s trading price.

Next: How Do Stocks Really Trade?

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