Abraham Maslow, in his groundbreaking 1943 paper, describes a pyramid of needs that must be met in more or less a sequence before human beings can realize their full potential. Food, clothing, and shelter form the base of that pyramid.
Friends, relationships, self-esteem, and a need to belong form the next set of rungs.
The tip of that pyramid of needs relate to self-actualization, a process by which we achieve our full potential. That is honing our craft, that is spending our time doing what we love, that is spending our life’s energy in pursuing what we are here on this planet for.
Self-actualization takes a backseat when you are merely trying to put food on the table or a roof over your head. Maslow‘s summary, hence of what an ideal society should look like…
What a man can be, he must be.
Abraham Maslow
Scandinavian countries have taken this to heart and actively work to get their citizens to that self-actualization phase. The rest of the world, not as much.
Take Norway, for example, and compare it to say the United Arab Emirates. Both big exporters of oil with about the same per capita production.
But Norway along with the rest of Scandinavia come out on top on any measure of happiness there is because the governments there actively work to make life better for their citizens.
And Norway is as prudent as prudent can get. They have seen the future. They know this thing (oil) will someday runout so what do they do with all that oil revenue? They deploy it into a sovereign wealth fund for their citizens which as of the day of this writing1, is the largest in the world. The fund invests in stocks and bonds of businesses across the globe.
And because of that, a child born today anywhere in Norway is automatically entitled to a quarter million dollars to his or her name. And that amount keeps growing. Those babies are set and so is the rest of the citizenry that are afforded a quality of life that only millionaires in America can afford. You can read about all of that here.
But back to the topic at hand, the global economy has its own version of the pyramid or to put it in the right context, an hierarchy with businesses, both public and private, forming the top of that value chain.
Without businesses, there is no economy. Without businesses, there are no jobs. Without businesses, there is no productivity gain. Without businesses, there is no innovation.
Yes, you can make it work though a patch work of government-run enterprises as has been tried in the old Soviet-bloc and in what we see today as a ‘shining’ example of running its course in countries like Venezuela and Cuba but they don’t work.
They won’t work because there is no profit motive. Human beings are not designed to work without a profit motive.
And without a profit motive, there is no business. And without a business, there is no economy.
Businesses hence, form the top of the economic value chain and the stock market, as flawed as it is at many a times, is the best way to own a piece of that value chain. Lucky for us. Imagine clicking a button and being able to own a piece of Apple or Google or ASML – all through the wonder that is the modern-day stock market.
The next rung in that value chain is occupied by bonds. When we buy bonds, we become a lender to governments and businesses, but ultimately, still businesses. Governments rely on tax revenues to pay back the money they borrow and without jobs, there is no tax revenues and its businesses that ultimately create those jobs.
And you lend money to a business in the expectation of getting paid interest as well as a return of your principal at the end of the loan term.
But if that business does not make money, you are not getting your interest, you are not getting your principal. That business, hence, must out-earn what it pays in interest to the bondholders or it does not survive.
And you own a piece of that business thought the stock market so by design, the stock of that business must out-earn the interest paid by the bond issued by that business.
So why would we then own bonds? Because they are short-term safer (less volatile). Bond investors get paid first regardless of the goings in the business before stock investors get anything. Bonds are less risky than stocks by design, but they won’t earn you as much as stocks.
And then there is real estate. Now that in theory, must earn even less than bonds. I am talking about real estate in aggregate, not one specific piece of property in say, San Francisco.
Employees make money for a business, but they also cost money. You can only afford that rent or that mortgage on that home because the business you work for clears enough profits to pay the bondholders a little, the stockholders a big chunk and then whatever is left is what eventually flows to the owners of real estate through your paychecks.
And businesses tend to cut that slice to their employees as thinly as possible. That is by design.
So, you better hope that the city you work in does everything possible to make sure the cost of living remains as reasonable as possible. Raise that too much and businesses will actively work to reduce that cost impact by moving jobs around. They might not tell you at your face but trust me, they are actively working behind the scenes to make that happen at every chance they get.
This is of course thinking in aggregates but when you own a portfolio of businesses spanning the globe, you must think in aggregates.
So, if you want to own the top of our economic value chain, stocks are it. They’ll give you ulcers from time to time but that’s the price you pay to own the profitable top.
Stocks indeed are for the long run. Not every stock, not every sector but stocks in aggregate.
Thank you for your time.
Cover image credit – David Mceachan, Pexels
1 December 31, 2023