The Stock Market and Investing - Very Basic

So some guy bought some stock in some company 5 years ago at $2 a share. The company is doing well and is giving a 50 cent dividend for the year which is a 5% return based on it's current stock value of $20 and a 25% for the year on the guy who bought stock 5 years ago if he doesn't sell. That is the essence of the genius of Warren Buffet. He buys companies, does not give a dividend and has the companies stock valuation rise by reinvesting in the companies. By doing this, his stock has had a 25% increase in value for each of the last 45 or so years.

In 2003 the Dow Jones Industrial Average sat at 8,000 and ended at 10,000. Today it is at around 15,000. That is a 50% increase in ten years. If you just put your money on one of the index funds, that is how much you would have made. That is how pension funds should invest, betting on the long term. The housing market traditionally worked the same. It averaged 5% appreciation a year for the past 200 years and that is what the average for inflation was also.

Here is wisdom for investing. If inflation sits at 5% a year and a company which invests in itself appreciates at 10% or better a year, you win. You beat inflation and your investment is compounding. Remember that this means putting about $85 a month in your retirement. That is only a buck an hour at minimum wage. Investing pension money is simple. Lets say you work for a company for 30 years. Each year, $1,000 is put into your pension. The first $1,000 would now be at $4,300 or so. The total contribution at a thousand a year is now worth about $69,000 just by doing 5% a year in appreciation.

Lets try this logic with a house. If I bought a house in 1983 for $100,000, it should be worth about $250,000 today. I am not trying to get into fancy math, just simple numbers. 5% a year inflation and appreciation. Mind you, the cost for 30 years of that mortgage is about $300,000 at 5% interest. The extra $50,000 is the interest you pay for the loan. Still, with tax right offs and such, buying a house was the best investment you could make because, you cut out a lot of expenditures at the end of the 30 years. You don't have to invest; but, you do have to have a place to live. In it's simplest terms this is why financial advisers have said to eliminate all debt and then buy a house for the average person.

I have done a really bad job of explaining this. Let me try again. If you put $1,000 a year in the bank and get 0% interest, in 30 years you will have $30,000. I know that makes sense. If you get 5% a year in interest then the money you put in 30 years age will be worth about $4,000 because it compounded interest. The thousand you put in last year would only be worth about $1,050. It only had a year to compound. That is easy to understand I hope. A house does about the same thing except it eventually becomes an expense that you don't have to pay anymore. I hope that made it simple.

Now, lets look at retirement. A house should be about 40% of your costs. If you retire with your house paid off, you should be able to live on 40% less. Again simple math. A depression is claimed to be when the stock market loses 20%. The housing market never lost 20% nationwide in history until the crash of 2007 came. This is why the value of your house does not matter. If you can pay off your house in 30 years and retire, you have cut your expenses by 40%. Simple math. In fact, if you take out a loan on a house and pay it for 30 years, while getting a 5% a year pay increase, inflation, at the end of 30 years your house payment is even less of your income as a percentage. That is what it means to be middle class. It means that if you are a good boy or girl, invest in your retirement and do your job, you should be able to retire because you own your home and have paid enough in to your pension to live on 40% less while doing better each year,

Here is Deming in action. If I promise to let you retire in 35 years, if you commit to my company and make us keep up with inflation or perhaps surpass it, would you? That is his theory. Mutual gain and mutual prosperity. I am still adjusting to my medicine and see the doctor today. Oh, boy, what fun. Best wishes.