The Only Way to Beat the Market Over Time

“Ahead of the Street” Column, by Mitchell Clark, B. Comm.

It is difficult to be bullish on the stock market right now. While the general expectation is for the economy not to get any worse, it really is difficult to imagine business taking off to the upside in virtually any industry.

The saving grace for wealth creation from the equity market this past decade has been dividends. Pull up a 10-year chart on the S&P 500 Index and you’ll see that stocks really haven’t done much at all. In fact, we’re far below the market highs set in early 2000.

Perhaps the greatest period of wealth creation from stocks was from the middle 1980s to 2000. For about 15 years, any long-term investor who just owned the index made money hand over fist. If you look at a 50-year chart of the S&P, however, you’ll notice a striking difference in the performance of stocks. For the most part, stock prices appreciated slowly. From the mid-1960s until 1982, stocks didn’t do anything at all but trade in a tight range. That’s almost two decades of no capital appreciation. Thank goodness for dividends.

There was a real bandwagon that jumped all over stocks during the 1980s and 1990s. Everyone was investing in mutual funds. Then, after the technology bubble burst, the same bandwagon effect rolled into the real estate market.

Looking at a really long-term chart of the stock market, I find one thing that really stands out. The performance of stocks over the last two decades has been exceptionally unusual from a historical perspective. When I look at the chart, it seems clear to me that the party is genuinely over. The stock market even looks to be trying to normalize itself with its historical price performance. If this turns out to be the case, it means that investors must have dramatically lower expectations of their equity investments.

What also stands out is that the major periods of significant wealth creation from stocks are relatively scarce. Therefore, the only way to be invested in stocks and actually beat inflation over time is to own those stocks that have a track record of increased dividend payments to stockholders. It’s how the rich get richer and, according to the charts, it’s the only way to beat the market over a long period of time.