10 Stock Market Truths With Sam Ro (EP.198)

0:28We all need to make smart decisions with our money. You can discover your biggest opportunities in just a few minutes with my financial assessment. There is a link at the top of the episode description of your podcast app, so be sure to check that out. Today, I'm joined by Sam Rowe, one of the most insightful market commentators out there and the author of the widely followed ticker newsletter. Sam has spent years analyzing financial markets, distilling complex trends into clear, actionable insights for investors. And we decided to have this conversation live from the floor of the New York Stock Exchange.

1:04And we dive into Sam's 10 truths about the stock market, essential lessons every investor should understand, whether you've just getting started, or you've been in the markets for decades. I've shared links to Sam's work on this topic and a whole bunch of other topics in the show notes at thelongterminvestor.com. His work is fantastic. He does a great job of connecting those daily headlines to the long-term investing principles, and I cannot wait for you to hear his insights. So let's get started. Here is my conversation with Sam Rowe.

1:40Sam Rowe, welcome to The Long-Term Investor. Thanks for having me. You're joining me here on Cheddar Set at the New York Stock Exchange. I love your sub stack ticker spelled T-K-E-R. That's right. I call it T-K-R-T-K-E-R for so long. And it took listening to you to get a conference to realize, oh my God, it's ticker. You're too smart for me already to begin with. And I have to tell people in terms of finding a resource that helps explain the world that's going on around us, yours is perfect. It hits, it's like you're a curator of content amplifying like the most important messages. Let me start very high level, a day in the life of Sam Rowe.

2:16What is the stuff that you're looking at? What is it you're watching, reading? How do you personally digest all the noise around us? I think like most markets reporters or most people in markets, you wake up and you see what the markets are doing, whether it's U.S. futures or what the Asian markets did overnight or what European markets are doing. And that gives you a sense of the pulse of the markets. And then from that, you back into what's the news, what's driving prices, what might be moving sentiment, what are we learning about the fundamentals of everything ranging from individual businesses to the economy all the way to the global economy.

2:52And then from there, trying to stitch these things together and trying to make sense of it all. For people who follow markets, the challenge is sometimes the prices don't necessarily reflect what you might assume would be happening based off of the news. But that's what keeps the job interesting for us. Well, I think a pro like you understand so well that just because you have your finger on the pulse of the market, a lot of what investors are really doing is trying to think of what everybody else is thinking about that pulse. It's kind of a secondary level thing that most amateurs don't really understand when they read the newspaper once a week or watching the weekend news.

3:28They panic about a headline. And so you're able to tie these narratives together in a way that's digestible while keeping the long term in mind. Yeah, I've worked in the news business for almost 15 years. when you are a reporter reporting on markets day to day, you have a responsibility to try to make sense of what's going on day in and day out. Something that's different about what I've been doing with my newsletter for the last three years is I'm not necessarily trying to address what's going on on a daily basis. I write for a reader that's more focused on the long term. What does this information mean for my long term savings, my retirement portfolio, etc, etc.

4:06And so sometimes the headlines take on a different nature when you're thinking about what the one-week price movement is versus the one-day price movement is. It's definitely challenging. It's a different kind of muscle to use when you're trying to make sense of things in a longer-term context. But anybody who turns on the TV knows that one day the market's up, one day the market's down, and we have to try to make sense of it while keeping our wits together. Well, good long-term investing advice doesn't change that much. And it can get boring. And what you do such a nice job of as you are tying in today's news and headlines into that longer-term narrative is when you're on your newsletter, you can link back to other things and just keep going down the rabbit hole the more you want to learn.

4:52Every time that I'm reading something that you have written, somehow I end up finding my way clicking back to the 10 stock market truths. And that's what I want to focus a little of our conversation today. it's interesting as i go through them i would rank what i think is the most important occasion i'll call them out but there's no doubt the very first one that the long term is undefeated is the most important and i think it's really interesting that someone like you who is covering this daily weekly monthly current trend highlights that so maybe talk and start us off there first of all everything that i write about including everything in the pen truths about the stock market is all based off of data.

5:30There has to be some data to support what we're talking about and how we put the present and the news into historical context so we understand what this could mean for markets and where markets could head further down the road. But yeah, the first truth, this idea that the long game is undefeated, the stock market has historically figured out a way to overcome challenges and move forward. There's a lot of nuance to that kind of observation, but it's the kind of thing that people like Warren Buffett keep hammering at. One of my all-time favorite pieces that he's ever done was he did an op-ed for the New York Times in October of 2008 during what felt like the depths of the financial crisis, but we actually saw the S &P 500 fall under 40 % before it was all said and done.

6:16But the point is, in his op-ed in October 2008, which was titled Buy American, I Am. He has a paragraph where he lists out a slew of various crises where it felt like it was the end of the markets. It was the end of the economic world. Then he concludes it by saying that the Dow went from double digits to five digits within a couple of decades. When you take a closer look at some of the stuff that Warren Buffett has talked about, it includes mentions like the market has overcome pandemics. This was a statement he might have made 20 or 30 years ago, which became very relevant four years ago. And so it's this idea that, of course, there will be these things that will challenge people's faith in capitalism or the markets, question people's positions when it comes to their investment portfolios and stuff.

7:09But when you just look at the history, there's just this remarkable track record of the economy and the business community and policymakers and folks figuring things out so that we get to a better place. I think I remember that article. And if I don't, then you may remember there's this one line in it, or maybe something you wrote later where he's like, I'm not saying this is the bottom. I'm just saying, look, markets are great. The human spirit is something you ought to be optimistic about. And it's okay if I don't buy at the bottom. I'm buying now because it's a discount. ever since that was my first bear market professionally.

7:43It was 2007. So I'm sitting in front of my Bloomberg terminal thinking, oh, this is normal. Like this is what a bear market feels like. Turns out that is not exactly true. It is pretty severe. But ever since then, I have found myself as a writer myself, every time the market's down 10%, I'm required to talk about the correction. And a lot of times everyone at PlanCorp where I'm working daily knows that I'm pretty annoyed that I'm writing that newsletter. Because usually I feel like wake me up when we're down 30 % because those short-term losses are so, so common. It's something that you say is maybe it was truth number two, the short-term volatility.

8:17So let's talk a little bit about that. Yeah, I think the exact wording I have is you can get smoked in the short term. I think one of the better stats that I've seen recently is 47 % of trading days, the market actually closes down. So if you're looking at the stock market on a one-day basis, you're closing down 47 % of the time and you're closing higher 53 % of the time. The conclusion is still that the market tends to go higher, but any given day you turn on the news, there's basically a 50-50 % chance that the market is going to be down that day. And so that gives you kind of a distorted view of how things actually work.

8:55But when you start to expand that time horizon, you realize that if you expand that to a year, it's more like 75%. If you expand that to three or five years, it gets to more like a rolling 90 % chance that the market is higher. But I think it's important to understand that, yeah, in the near term, prices can fall. I think when you get into the stock market, when you invest and take that risk, you have to fully be aware of the fact that you can have significant paper losses in the short term. Because if you're not prepared for that, at least mentally, then you're going to panic when that time comes.

9:30it's better to know that you can have a 10%, 20%, 30 % drawdown when things are calm, because then you can sort of prepare yourself for when that actually happens. But yeah, another one of my favorite stats when it comes to that observation is that in a given year, the average max drawdown you see in the stock market is about 14%. So from the high of the year to the low of the year, there is a 14 % max drawdown, which is pretty significant. Like your stones throw away from a bear market, but that's just the max drawdown in a given year. And in most years, the stock market actually ends up higher.

10:06So if we're talking about market volatility and things that unsettle us, I think it's healthy and it's probably smart to understand that even in a normal year, even this year, in 2025, we could see the stock market fall 14%. And that is actually just a part of getting to longer term riches. Yeah, it's the cost of those higher returns that you earn from being an owner. I mean, it's equity state in a business. And I think in general, whenever there is the next 10 % drawdown, we don't know what the reason will be. They'll sound like uniquely scary. Around the time it's at 20 % down, I feel like you don't quite get the this time is different headline, which we all know is kind of the worst words in finance.

10:51The 30 % starts getting scary, and they do happen about once a decade. So I think in knowing that on average, you're going to see the drawdown on average is going to be 14%. The rough statistic is every 12 months, historically, there's been a 10 % plus drawdown. Don't worry about that. That is a great headline. That is great for something to click on. It gives guys like you and me something to talk about on our platform. But realistically, it's all just what gets rolled up into that long-term average return that we never earn, by the way. Excellent opportunity to transition to another truth, which is the market never gives you average returns.

11:25Yeah, when you first hear about stuff like investing in the stock market, I don't know if it's when they first teach you about compound interest in elementary school or when you start learning about personal finance as you get older, you're always given this advice that you should take some risk and go into the stock market, put money into the stock market, because historically you can get something like an 8 % to 10 % nominal return. it's very attractive. I mean, it's a lot better than whatever else you're going to be saving your money in. But 8 % to 10 % has happened only 5 % of all years in history.

12:00It's extremely unusual to actually get 8 % to 10 % in a particular year because those averages are calculated based off a whole wide range of returns. Like obviously there are years when you have negative returns, but in most years you have double digit returns that are actually much higher than 8 to 10 percent. There are 20 percent years, 30 percent years, 40 percent years and of course you have those occasional years that bring that average down but when we do have years even just like the past two years when you have back-to-back 20 percent plus years it's really easy to get caught up in this idea that the market might be getting ahead of itself but you go back three years we also had a 20 % downturn.

12:44We were coming out of a bear market. And when you average minus 20 plus 20 plus 20, you start to get back to what those long-term averages are. So yeah, I think it's all part of, like we were saying with, you can get smoked in the near term. It's not managing those expectations. I think if you go into the stock market thinking 8 % to 10 % every year, then you're more prone to making a mistake and panicking when those downturns happen, and maybe even panicking when you have a large upturn. But if we think about, again, it's all based off of the historical data that things can get volatile. It just makes you a better investor.

13:18Well, and you have so much great data that you highlight, not just in this article, but in all the articles. And so if you're watching us, if you're listening to us, you have to go to the long-term investor.com because I'm going to link to all of Sam's stuff. The easiest way you'll be able to subscribe to his newsletter comes out every week. One of the best reads I have, one of the few sub stacks I actually pay for, for the record. You help me keep the lights on. We have to support those who are putting good information. It's already hard enough to filter out all the garbage. And I think that we're talking about long-term returns.

13:47And today, one of the conversations I find myself having with clients is very political. They are either very happy about politics or very unhappy about politics. But there are policy changes that we think are going to happen, that we're unsure going to happen. And a lot of times, this core piece of what you talk about, one of the truths is that it's all about earnings. You have to remember to think about earnings. And I remember one of the best lessons I ever learned as a younger investor is when you zoom out and you look at the earnings of the S &P 500, along with the price of the S &P 500, they basically are on top of each other.

14:20So hopefully I didn't steal the thunder here. Talk to me about why earnings are just the key driver of it all. It's probably one of the more intuitive things about investing. This concept of equities and stocks and bonds can be really confusing. But when you think of it in terms of ownership in a business, what is the goal of owning a business? Well, hopefully customers show up and there are enough customers that show up that you're able to cover your expenses and your taxes and your interest costs that you might have a little bit of profit that you can take home. And the value of a business is going to be derived based off of those profits.

14:53So if you think about the stock market in those terms, it begins to make a little bit more sense as to why stock prices move in a certain direction. And so when we look at the stock market in aggregate, it turns out it tracks the direction of earnings profits very closely. It's tracked it very closely for 100 years. And of course, that would make perfect sense because that's essentially what you're paying for. But yeah, when it comes to anything, whether it's what may be going on with inflation or what may be going on with commodity prices or interest rates or even policy and politics, there's all kinds of concerns that all these things can raise.

15:31I think it's very healthy to be very riled up when it comes to politics. But if you're thinking in terms of your own finances, especially in the context of your investments on your stock portfolio, the question comes down to, well, what does this mean for the profitability of the companies that I'm invested in? And in order to understand that, you have to understand, well, what policies are going to affect this? What policies are going to affect the direction of the economy and how people think about spending and investing and all that kind of stuff? And if you can come to the conclusion that the prospects for earnings and earnings growth is intact, then the outlook for the stock market might be a little bit better than what you might feel in terms of what might be going on in the world around you.

16:17I wrote a blog post the day before election day, and I wrote it to be directed at whoever was unhappy about the outcome. And there was so much in there in that piece about earnings. And it says whoever is running the country and whoever's running Congress, McDonald's is still going to try to sell cheeseburgers. Coca-Cola is going to still try to sell Coca-Cola. The let's just broadly say the CEOs of these companies, they like money. And if that becomes not true, then there is maybe a little bit of a problem. The same logic applies on the consumer and the customer side. Our lives don't stop for four years for what might be something else that comes down the road.

16:58We're all getting older. Our kids are going to grow up. No one's going to say, because of X, Y, Z thing, we're canceling Timmy's birthday for the next four years, or we're not going to go to Disney World this year. I mean, yeah, sure. At the margin, some people might actually make those decisions, but the nature of the economy is some other people are deciding, well, now's the time to go to Disney World. But I think the point being is that something that underlies all of the stuff that we're talking about, whether it's the long game being undefeated or earnings and all these things when we think about investing in the stock market, is it's fundamentally all driven by people and entities who ultimately want better for themselves or better for their loved ones.

17:41We want goods and services to be a higher quality than they are. Nothing is ever good enough. Nothing is ever cheap enough. Nothing is ever fast enough. So there will always be an opportunity for a new business to come out and do things better than how they already are. And it is the case that some of these businesses, they emerge every day, they grow, and they eventually displace the ones that are the current incumbents. And then suddenly you have everyone's standard of living is better. Everyone's earnings are up and the stock market goes up. All tied together. And it's really intellectually beautiful when you get down to the simplest level, in my opinion.

18:19And even what you're talking about, this innovation, I mean, it causes a lot of turnover in the broader indexes. There's a few winners that basically drive all the returns. And then a lot of people just fall out of the index eventually. And they're replaced with other people who eventually carry the index as they grow their way from being a nothing to being the newest member of the MAG7, figuratively speaking. Can you talk a little bit about the turnover that happens in the index? I think one of the biggest misnomers out there in investing is the idea that when you invest in like an S &P 500 index fund, you're passive investing.

18:56And sure, you're not making a lot of decisions, but the S &P 500 sees quite a bit of turnover. On a rolling 10-year basis, we see about 30 % of S &P 500 names get swapped out. Whether they fail, whether they shrink and get replaced by another company that's a little bit bigger, whether they get acquired or whether they bought out. Bottom line being is that the index is constantly being replaced by quote-unquote better companies with better earnings prospects and better upside to their stock prices and stuff like this. I think even before a lot of us even got into the business of investing or even thought about investing, companies like Meta and Alphabet and Amazon didn't even exist.

19:38And so therefore, they weren't even in the index if you go back 15, 20 or 25 years. But now they're the ones that are driving the index higher. So when I make statements like the stock market usually goes up, it's not a statement that all stocks are always going up all the time. I think when you think about the market or the S &P 500, it's kind of like a sports dynasty. We're in New York. Let's talk about the Yankees. The Yankees is not a static team of baseball players. They have all these championships because of Derek Jeter. And before Jeter, there's Mickey Mantle. And before Mickey Mantle, there's Roger Maris.

20:12Go back to Babe Ruth. There's turnover. There's turnover in the Yankees. But somehow the Yankees have this really proud dynasty that we can talk about. It's the same thing with the stock market. It's a very raw and brutal manifestation of capitalism that if you're paying attention to the stock market and S &P 500 long enough, you see old names get dropped out. The Dow Jones Industrial Average, 30 stocks. None of the original members of the Dow 30 are in the index today. And that's the nature of investing. Losers get replaced by winners, and the winners carry the index up to another higher level.

20:46I'm always taken aback when I see those stats that maybe 5 % of S &P 500 names get replaced every year. And then rolling 10-year periods, 30 % of the names get swapped out. The winners, the people who are at the top, the top 10 companies in the S &P 500, they rotate quite a bit decade to decade. And one thing that seems similar in theme on the stories about them in the decade in which they're leading is that they're always called innovators, regardless of their business line. So I think today it's easy to think, well, yes, big tech is the innovator. And yes, they are at the top. And what you'll see is over time, those 10 years, five years, three years leading up to when they become a top 10 stock, the returns are clearly outsized.

21:28That's how they became a big stock. But after that, historically, they've been lower than average because the price you pay for fundamentals matters a ton. You talk about in the truth, the valuations, they matter. They're a terrible timing tool, but they do matter. And if you're buying a dollar of earnings today or if you're predicting that you're buying 60 years worth of earnings, that's a big statement. Oh, yeah, for sure. And it's always very tricky to figure out what the intrinsic value of a company is. There's all kinds of different ways you can do this. You can do it based off of a multiple of earnings.

21:58A company made$10 million worth of profit in a given year, but the market cap is$100 million. So it's like, oh, well, the company is worth 10 times earnings. But that doesn't account for the fact that, well, what if they have$20 million worth of earnings two or three years from now? Well, you're going to earn that back a lot faster than 10 years. But yeah, it's a big challenge when it comes to valuation and evaluating the intrinsic value of a stock. But I think the important thing, though, is when it comes to publicly traded securities and these publicly traded companies, the data, the historical data tells you that while something like a P.E.

22:38ratio can tell you if a company is above or below its long term value based off of these ratios, that doesn't give you any kind of an indication as to where the price of that company is headed. at least over the next year. So it's a thing to be mindful of when you're investing or even thinking about trading in and out of stocks is that, sure, you want to take these things into consideration, but don't be upset if an expensive stock gets a lot more expensive at the end of the year or a quote unquote cheap stock gets a lot cheaper at the end of the year. Yeah, I think valuations, you almost have to like earn the right to use them responsibly.

23:21You can't just take them at face value. You have to know a little bit more of the nuance. And I think in general, like you said, it is a great story to help tell yourself to stay the course of the strategy, perhaps, but it can last a long time. I think a great example of that is when we look at U.S. stock market performance versus international stock performance. U.S. stocks, especially large cap stocks, they are the clear winning asset class. They're like, when I have to sit down with a client and talk about their statement and explain why we don't have all their money in this winning asset class, I have to go back and remind them, well, about 15 years ago, nobody wanted money in this asset class.

23:55They wanted it in international. But a lot of the difference in return these days is just a reflection of people are willing to pay more for U.S. stocks today. It's going up and up and up. And so valuation is expanding. They can't expand forever. That doesn't mean that I know when it's going to stop. But at a certain point, you can pay too much for something. It's just you'll never be able to guess when that time comes. Yeah, yeah. On your point about U.S. stocks dominating on the global stage, there's a lot to be said about that. Like we're talking about with earnings, you know, one of the big drivers of why we have U.S.

24:27outperformance is because the earnings growth has been much stronger and more robust than what we've been seeing in the rest of the world. But another thing that often gets lost is the fact that when you're talking about U.S. stocks or even when you're talking about international stocks, the companies listed on those exchanges do a lot of business outside of those local markets. So the S &P 500, for instance, does anywhere from 30 to 40 percent of sales outside of the United States. So when you think about exposure to international stocks, maybe the thinking might be, well, there might be a better opportunity in this economy or that economy or whatever.

25:06The valuations are cheaper. But you have to understand that a lot of U.S. multinationals get a lot of business from those overseas markets. So it can't be as simple as geographic diversification. And if you get even deeper into it, there's a lot to be said about corporate culture or business culture and the way people think about how they run businesses. We can also talk about policy, too. An economic policy that's very friendly to businesses might thrive. You might create an environment where businesses thrive as opposed to another country where there's a lot of crony capitalism or there's a lot of corruption or corporate governance philosophy is completely different.