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Some Thoughts About Our Standard of Living

by on May 25, 2014 6:00 AM

Unlike gambling, where one wagers and hopes to be on the winning side of the deal and where winners equal losers less a playing fee, the stock market is a net additive endeavor.

Gambling is a zero sum game, while the stock market is actually biased towards the winners.

Within the overall direction of the economy and the investment markets, there are stunning winners and lots of disgruntled folks who lose money. The distinction between the two is not Lady Luck, as it would be at the casinos, but rather the competence of the investors participating in the investment markets.

So while I am not recommending you plunge into the investment markets with abandon, you must make a distinction between playing the lottery or slot machines versus investing in the equity of a growing economy through stocks and stock mutual funds.

When functioning properly, the economy and the stock markets are net plus endeavors not zero sum games. While this might not be evident from your personal experience, it is demonstrated by the increase in the standard of living in this country over the past couple hundred years.

The growth of wealth in the United States far exceeds devaluation of the currency over the same period. Many folks in the United States are builders and entrepreneurs, creating value from their efforts that spread throughout the economy.

Our standard of living has been rising for a long time because we excel at reducing costs and creating new possibilities through the application of technology to almost all of our human concerns. This is the primary source of the increase in our standard of living for the past two or three hundred years.

Please note: all policies of income redistribution, while perhaps virtuous for other reasons, do not increase the standard of living for the country. Redistribution of money actually reduces the wealth of the country in aggregate. Excessive taxation also reduces the wealth of the country over long periods of time.

In the short term, stock prices rise and fall (you know them as bull and bear markets), as do the values of real estate, precious metals, art and diamonds. Interest rates rise and fall with a fifty year cycle. Yet over the very long term the prices of equity on net increases because we have a rising standard of living that results from the application of technology.

Technology lowers the cost of providing essential goods and services to our population, allowing most of us to have far more things than the generations that went before us.

The American Dream is that we sacrifice for our children so that they will have a higher standard of living than we have. From time to time this uniquely American idea might seem to fade a bit or perhaps get lost in the conversations of the day.

Happily, I say the American Dream is still marching ever onward. For proof of this you only have to look at the amazing developments in biotechnology, electronics, optics, nanotechnology and other areas generating technological breakthroughs that are followed with commercially successful endeavors based on new technology.

While we may sometimes be distracted by the declining value of the dollar, or high unemployment, or gridlock in Washington or terrorism and the ill treatment of people around the world, or global climate change, America and its free market capitalism (think entrepreneurs) coupled with property rights and the rule of law make America the shining beacon of what is possible for the rest of the world.

So the next time someone mentions that the stock market is just a crap shoot or is akin to gambling, please set them straight. It is an endeavor that is not totally dependent on Lady Luck like gambling, but is instead an arena where the competent can succeed over the long run.

Fifty years of personal experience grounds this opinion. This is not to say that we cannot end our two hundred plus years of progress.

Certainly we haven't been doing too well lately. Yet I have faith and trust in the American people that we will right the ship and get back on track in the years ahead. The last time we ran off the rails (1966 to 1982) we changed course and enjoyed a twenty year period of outstanding growth in the economy and the investment markets.

Soon it will be time for Bill Gates and Warren Buffett to pass the baton to the next set of new billionaires. I wonder who they will be.

Dan Nestlerode was previously the Director of Research and Portfolio Management at Nestlerode & Loy Investment Advisors in State College. He retired in 2015 after 50 years in the investment business. A graduate of Penn State University, Nestlerode became an investment advisor in 1965. He can be reached at [email protected]
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