The "Millennial Investing" podcast episode features host Robert Leonard and guest Brian Feraldi, author of the new book "Why Does the Stock Market Go Up?". The discussion delves into fundamental investing concepts, highlighting what isn't typically taught in schools but is crucial for financial success.
**The Absence of Financial Education in Schools**
Brian and Robert lament the lack of personal finance and investing education in the U.S. school system, even for business majors. They suggest that teachers themselves often lack this knowledge, and schools don't prioritize creating such courses. While academic finance covers theoretical models like Beta, it often fails to address the practical, psychological aspects of investing, which Brian and Robert believe are paramount. They commend Florida's new requirement for personal finance education in high school as a step in the right direction.
**The Intrinsic Value of Stocks**
Feraldi emphasizes that a stock is more than just a fluctuating number on a screen; it represents partial ownership of a business. Its value is derived from the company's assets and its current and future profitability. Using a simple example of a candy store, he illustrates how investing in a stock means buying a legal claim on the company's earning streams. This fundamental understanding is often overlooked because market participants tend to focus solely on price movements, mistaking investing for gambling.
**Understanding Market Indexes: Dow, S&P 500, and NASDAQ**
The conversation clarifies the origins and differences of the three most common stock market indexes:
* **Dow Jones Industrial Average (DJIA)**: Created in 1896 by Charles Dow and Edward Jones, initially as an average of 12 industrial companies' stock prices, later expanded to 30. It's a simple, price-weighted average, offering a quick snapshot of market sentiment.
* **S&P 500**: Developed by Standard Statistics (later Standard & Poor's), it expanded to 500 companies by 1957. Unlike the Dow, it is market-capitalization weighted, meaning larger companies have a greater impact on the index, providing a broader representation of the U.S. economy.
* **NASDAQ Composite**: Launched in 1971 as the world's first computer-based stock exchange, it includes all companies listed on the NASDAQ exchange, often associated with technology and growth stocks.
**Public Companies, Capital Raising, and Shareholder Dynamics**
Feraldi explains that all corporations, public or private, have shareholders. Companies go public (via an IPO) primarily to raise capital for growth, gain market visibility, and provide liquidity for existing shareholders (like venture capitalists). Crucially, when an investor buys a stock *after* its IPO or a secondary offering, their money usually goes to another investor selling shares, not directly to the company.
However, companies still care deeply about their stock price because:
1. **Management Performance**: A declining stock price can lead to management changes by unhappy shareholders and the board.
2. **Corporate "Currency"**: A high stock price makes it easier for a company to raise capital through secondary offerings or make acquisitions using its own shares as currency.
3. **Employee Incentives**: Employees and executives often hold company stock, aligning their interests with shareholders. The GameStop example illustrates how a soaring stock price can offer a failing company new options for survival and growth.
**Dilution vs. Share Buybacks**
When companies issue new shares (dilution) to raise capital, existing shareholders own a smaller percentage of the company, even if the capital injection is intended to increase the overall value. Conversely, share buybacks occur when a company repurchases its own shares from the open market, reducing the total number of outstanding shares and increasing the ownership percentage of the remaining shareholders. This is common for mature, cash-rich companies like Apple or Berkshire Hathaway.
**The Art of Stock Valuation**
Valuation is complex but essential. It's the process of determining a company's worth based on its current financials and future projections. Feraldi uses a "Shark Tank" analogy to explain that valuation dictates the return an investor can expect. Paying a high valuation means accepting a lower earnings yield, betting on future growth, while a lower valuation offers a higher immediate yield. Different investors have different required rates of return, making valuation subjective and personal.
**The Long-Term Upward Trend of the Stock Market**
The U.S. stock market's historical upward trend is driven by fundamental factors:
* **Profit Growth**: Companies become more profitable over time.
* **Inflation**: Rising prices increase company revenues and profits.
* **Productivity**: Efficiency gains lead to more output with fewer inputs.
* **Population Growth**: More consumers translate to larger markets.
* **Innovation**: New products and services create new market opportunities (e.g., smartphones).
* **Capital Allocation**: Share buybacks and dividends return value to shareholders.
While these drivers generally push the market higher, Robert raises a valid concern about the Japanese Nikkei market, which saw decades of stagnation after its 1990 peak. This highlights that past performance is not a guarantee and warns against assuming U.S. markets will *always* recover swiftly. Feraldi acknowledges that investing at high valuations can lead to challenging periods, but emphasizes a long-term, continuous investment strategy ("Just Keep Buying") as the most robust approach for multi-decade horizons.
**Diversification and Risk Management**
The episode concludes with Tom Engel's quote: "If this company is the next great growth stock, then a little is all I need. If it's not, then a little is all I want." This powerful statement underscores the importance of diversification. Even if a small position in a company like Amazon or Netflix exploded, it could lead to substantial wealth. Conversely, if a stock fails (like pets.com), a small position limits the downside. Feraldi points out that even highly successful stocks experience massive drawdowns (e.g., Amazon falling 92%), making it incredibly difficult to hold through such volatility. This underscores the emotional and behavioral challenges of investing, making risk management and diversification key strategies for long-term success.