In this episode, I look at over 100 years of stock market data and tackle the common misconception that 'what goes up must come down'.

I'll show you why the evidence proves that what goes down must come up.

We'll dive into the simplicity of stock investments, the role of the global economy and inflation, and illustrate how shares track profits over time.

My aim is to provide you with clear, evidence-backed insights into why stock prices have always grown, and why they will continue to do so.

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IMPORTANT: Your Capital is at Risk. Investments may not be covered by the FSCS. This is NOT investment advice - for information purposes only. Please seek advice from a regulated advisor before investing. The value of investments can fall as well as rise - don't rely on past performance.

Welcome to the Invest Like a Pro podcast, teaching you diversified

investing with a simple set and forget approach to stocks and options.

Build inflation beating wealth for your future and recurring income for today.

And now your host, former J.

P.

Morgan investment manager, Manish Kataria.

Hello and welcome back.

So I heard something the other day which I thought was complete nonsense.

And this was from a widely followed influencer who said, What goes up?

Must come down, referring to stocks.

Now, this is complete nonsense, clickbait, and the evidence is quite the opposite.

The reality is what goes down must go up.

Now, we know that stocks have returned 8 12 percent per annum,

on average, for centuries.

i.

e.

they have doubled every six to seven years.

So that's the evidence.

I wanted to show how and why that's the case in today's episode.

It's really quite simple.

And I'm really sorry, conspiracy theorists.

It's nothing to do with printing money.

It's not about speculation.

It's far simpler.

Let's get into it.

The first thing you should know is stocks And investing in shares is

not about charts and squiggly lines.

That's irrelevant, okay?

That's trading and that's just speculation.

Stocks actually are a real investment.

You legally own a piece of a real company.

Companies that make real stuff that people really need, okay?

And when you're an investor, you're entitled to a share of its profits

and dividends we've got all the, the best companies around the world.

These are companies that are making real goods, providing real services

that people need on a daily basis.

Okay.

As I said, when we are buying shares, we are buying company profits and

I'll explain how that works.

And you don't even need to decide which shares to buy.

With a fund or an ETF, you simply own them all in a diversified way.

And the best thing, this doesn't need any specialist knowledge, doesn't

need a degree in economics, and you certainly don't need to be rich.

Share prices grow because profits.

grow, right?

But how do profits grow?

There's only two things you need to be aware of.

Two big determinants of what makes profits grow.

Number one, it's the global economy, which has always grown.

And number two, is inflation, which is always there.

Okay.

Those are the two key ingredients that provide share price growth

both historically and in the future.

So when the economy grows, That means spending is growing, right?

When the economy grows, people are buying more things.

That's the definition of economic growth.

Now, humans can't survive without growth.

It's in our nature.

Even in troubled times, the economy has grown, and actually, if you

look back at world GDP, It actually doubled from 50 trillion dollars in

2007 to 100 trillion dollars today.

Okay, now think about all the crises, the wars, the pandemics,

the recessions, the growth in interest rates etc, during this time.

But the economy has still grown, okay?

And as GDP grows, that means companies receive more sales.

And that means Company profits grow, which is what makes share prices rise.

Company profits and of course, GDP doesn't always Grow in a straight line.

Not so long ago we had the pandemic the lockdowns, which caused

global growth to decline, okay?

And before then we had the global financial crisis back in

2008, which led to a recession.

Okay?

So that happens from time to time, and we expect that goes with the territory.

And that is what economic cycles are about.

But actually, if you look through time, by far the majority of

the time, the economy has grown.

And when it doesn't grow, when it falls into a recession, that's your opportunity.

The second reason stocks rise is inflation.

Now companies Love inflation.

Inflation is always with us.

And don't forget this.

The reality rate of inflation is much higher than what we're

told in the official figures.

Many times more.

Okay?

And actually, inflation grows company profits, and that's

why companies love inflation.

So let's illustrate this with a simple example.

Let's have a fictitious company that makes stuff, okay?

So let's have a look at its its performance and its accounts, okay?

Very simple illustration.

So last year, this company making stuff created revenues or sales.

of 100, 000, okay?

And to make that stuff, it had costs of 80, 000, okay?

So net, it generated profits of 20, 000, okay?

100 minus 80 is 20, 000.

Now this year, okay, let's imagine we had inflation of 10%,

just to keep the numbers simple.

This year, the global economy had inflation of 10%, okay?

So revenues, increased to 110, 000.

That's just a 10 percent increase.

Costs increased to 88, 000.

Again, a 10 percent increase.

So let's see what happened to profits.

So very simply, 110, 000 minus 88, 000.

This company generated profits of 22, 000.

And you'll notice That is a growth figure of 10%.

This company has generated profits of 10%, okay, in just

one year because of inflation.

We're not even talking about if it sold more stuff.

Let's assume it sold no more stuff.

Let's say the economy didn't grow at all, so it didn't sell any more stuff.

It just benefited from inflation.

It saw its profits growth of 10%.

In reality It's even better than this because what we've assumed is that

all costs grow in line with inflation.

Actually, in reality, many costs are fixed in nature.

Okay, think about rents.

Rents don't grow every year.

Staff costs don't grow immediately we're making a few assumptions, but in reality,

companies love inflation, because their profits grow in line with inflation.

So overall, as the economy grows, and because inflation is always

there, that must translate into growth of company profits, right?

Is that borne out by reality?

Absolutely.

Company profits have always grown.

Yes, during recessions, they decline, which is what you'd expect,

but over time, they have grown.

For decades and centuries, company profits have always grown.

And actually, That's company profits.

But remember, we're buying shares, right?

And shares, the good news is, shares track profits perfectly.

So this has been the case for decades and centuries.

Shares track profits.

Profits.

move in line with with the growth of the economy and with

the growth of inflation, okay?

And in fact, over decades we've had thousands of percent of

growth, translating into an average annual growth rate.

Growth rate in shares of 11 percent per annum, okay?

And as I mentioned, stocks have doubled every seven years.

And now you see why, right?

Very simply, two things that have always been the case, the growth

of the economy and inflation.

Very simply leads to profits growth, which leads to share price growth.

So now we know how shares work, and now we know why share prices

have always grown over time.

And of course, we get the decline when there's a recession.

Or when there are concerns about the state of the global economy.

Of course we get declines, and again, that is your opportunity.

Those are the times to capitalize

So we've seen that shares track profits, but it's actually more than that.

They actually have to, profits.

Why do they have to track profits?

And how do they do that?

So let's take an example.

We know that earnings go up over time, always have done, always will do.

So let's take an example, a simple example.

A share with a price of 40 pounds per share, okay?

It has earnings or profits per share of four pounds.

So that's pretty simple share price of 40, earnings per share of 4, which

leads to what's called a price earnings ratio, or a P E ratio, which you

might have come across, of 10 times.

Very simply, that's the share price divided by the earnings per price.

P divided by E is 10 times.

The market perceives this particular share to have a fair valuation, a P E

ratio is a valuation, of 10 times, okay?

Imagine later down the line, earnings go up.

As we've seen, earnings always go up, okay?

So for this company, earnings per share will go from 4 to

5 pounds per share, okay?

What would happen, let's imagine a scenario where the share price didn't

go up, let's say it just stayed at 40.

Now previously that price to earnings ratio was 10 times, but

now, because earnings have gone up, now, 40 divided by 5 is 10.

is eight times.

Okay, so that's dropped.

Now, just an additional piece of information on the price earnings ratio.

It's a measure of valuation, but it also tells us that if we were to buy

this company outright for 40 pounds per share, If all the earnings that

were being delivered to us on a year on year basis on a 10 times valuation,

that tells us that this company would pay us back in full within 10

years, 10 lots of earnings, okay?

10 lots of 4 per annum is 40.

And now, what this is telling us, that actually this will

pay us back within 8 years.

Thanks.

Some people would perceive that as too cheap, because previously it was 10 times,

and now it's dropped to 8 times because the share price hasn't moved, but the

earnings per share have increased, okay?

But actually because that now looks too cheap, The fair valuation

should actually be 10 times.

What happens then?

Because the fair valuation is 10 times, what would happen to restore

that valuation back to 10 times is that the share price would

have to go up to 50 per share.

That's a gain of 20% which is in line with the the amount earnings per share.

have increased.

Okay, so this is a very simple example, but born in reality, this is

actually what happens to share prices.

When their earnings per share go up, to maintain the same P E ratio, or the

same valuation, the way to adjust that is that the share price has to go up.

There is no alternative.

It has to go up, which is another way of explaining why share prices

have to track earnings, okay?

So instead of the share price just staying flat, the share price has to go up.

So we see going back over time, historically, when you invest in a

perfectly diversified way when you buy.

Diversified ETFs.

When you buy diversified funds, shares have never resulted

in a permanent decline.

Okay, so we see that through decades and centuries of data.

And finally, my message is always to follow the evidence.

When I teach investors, I teach them to follow the evidence.

The evidence.

And we see, we zoom out, we've shown data over the last 50, 60 years, right?

I can go back to, the 1800s, and it's the same story.

Shares have grown over time, regardless of what the world throws

at the stock markets, whether it's wars, and pandemics, and recessions,

and crises et cetera, et cetera.

Shares.

always go up.

Not just by inflation, by beating inflation.

We have real terms, inflation beating growth, and that's what

makes stock markets such a powerful and proven and tested asset class

to create your financial freedom.

Okay, so the message is follow the evidence.

Don't follow clickbait headlines like what goes up must come down.

Nonsense like that may sound good.

but has zero evidence.

So next time you hear anybody saying anything along those lines, just

ask them to show the evidence, okay?

And if they can't show the evidence, it's just clickbait that's trying

to get something from you, okay?

And in the notes, accompanying this episode.

You can find a step by step guide, my step by step guide, to investing,

including guidance including calculators, and including all sorts of nuggets

which you may never have come across.

So look out for the roadmap to investing in the notes, and if you

found this episode useful, please subscribe and follow for future

episodes and future insights like this.