The Ups and Downs of Wall Street Follow This Simple Rule

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One of the great joys of teaching is watching a student really absorb the roots of a lesson -- not just a particular set of facts, but fundamentals and processes that they'll be able to apply again and again. And while Motley Fool co-founder David Gardner might not have a classroom, there's no doubt that he does view himself, in part, as a teacher. It's not for nothing that the company's original motto was "Educate. Amuse. Enrich." Today, that's been updated to "Making the world smarter, happier, and richer," which, obviously, hits the same themes.

Earlier in May, the Motley Fool asked our Twitter followers, "What investment principles and ideas have you learned from David Gardner?" The answers were so gratifying to Professor G. that he's dedicating an episode of his Rule Breaker Investing podcast to a quick refresher course on those lessons. In this segment, he takes his cue from listener Peter, who probably has been able to invest with much more peace of mind thanks to his understanding of this lesson: "Stocks always go down faster than they go up, but they always go up more than they go down." Here's what that means for you.

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To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

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This video was recorded on May 22, 2019.

David Gardner: Alright, next up. This is from Peter Rogner, @Peter_R_Aus_H. One of the more ambitious Twitter handles. Peter, I hope I got that one right. But you sure got it right when you said this. You said what you've learned for me, "Stocks always go down faster than they go up, but they always go up more than they go down." I love that quote! Thank you, Peter! I love that you quoted it verbatim. You nailed it! Sometimes, when I'm trying to lock down a quote that I want people to remember, and I'll have a few others later this episode, it makes me slightly sad if they change one of the words, we kind of get it wrong. You got that exactly right! I'm going to say it again, Peter -- stocks always go down faster than they go up, but they always go up more than they go down.

I think I want to say something about both halves of that briefly. The first part, yeah, stocks go down faster than they go up. I think we've seen that some in recent months. We've seen some bad days. Within the last couple of weeks, there was a down 3% day for the NASDAQ. You're not going to find as many up 3% days, in my experience, for the NASDAQ. And forget about one day, sometimes just a whole month. How about fourth quarter of last year, 2018? A whole quarter. I think my investment portfolio lost about 25% of its value in just one quarter at the end of last year. That happens a lot faster, in my experience, on the way downward. And then we have to slowly creep and crawl back upward. Yes, there's some good days and good quarters. And we've had one. The first quarter 2019 was an outstanding retracement, where we got back to where we'd started the fourth quarter of last year. We dipped down and came all the way back up. That's how it felt, anyway. But, stocks always go down faster than they go up.

That second part, they always go up more than they go down. This is the key part of the phrase. It's self-evident if you just take a look at a graph of the stock market over the last century. It starts in the lower left, it goes to the upper right. That is the reality. And I predict, as I have on this podcast, that that's what's going to happen in the next century. We're going to keep creating value for each other. That's what we do through business. And then we can co-own each other's enterprises. That's what we do in the stock market. And as we continue to innovate, we continue to improve the world, and find better ways to serve you and me more cheaply or more amazingly, that's the story of capitalism done well. And it ends up resulting in decades and a century of gains. So, stocks always go up more than they go down.

A lot of people don't know this -- I know you do, dear listener, but a lot of people don't realize that the stock market rises around 9% or 10% every year, compounded on average. Yes, there are years where it's down 29%; there are other years where it's up 45%. But take it all in all, an average gain of around 9% to 10% annualized, which is amazing! So of course, stocks always go up more than they go down.

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