In this section: Overcoming Inertia The Power of Compounding The Odds Are in Your Favor

THE FINANCIAL MARKETS are often compared to a casino. You know, put some money down on Intel and you might as well be playing blackjack. If that's your impression, and it's keeping you out of the markets, consider this: If investing is organized gambling, it's one of the rare kinds where the odds are stacked in your favor. First the circumstantial evidence. Take a look at the applet below. The fever line you see represents returns of the stocks in the S&P 500 index over the past seven decades. While the line zigzags up and down from year to year, the overall trend is upward. If in 1929 you'd invested $1,000 in large-cap stocks, you'd be sitting on roughly $1 million today, according to data from the Center for Research in Securities Prices.
Sources: Bureau of Economic Analysis, DJNR, Standard & Poor's
Those long-term gains are all the more remarkable when you consider that the 75 years in question included the Great Depression, the market doldrums of the early 1970s, the two market crashes that punctuated the 1980s, as well as the recent bear market. The 10-year periods with positive returns far outnumber those in which investors lost money. Why is that? Corporate profits are the key to understanding the investor's edge. We'll explain more about how stocks work later, but for now, understand that buying a share of stock gives its holder an ownership claim on that company's earnings. If those earnings go up, then the stock price will usually rise as well. Makes sense, doesn't it? Ownership of a company that has higher earnings should be worth more than ownership of a company that earns less. If you click on the button labeled "corporate earnings," you will see that the line closely parallels that of the S&P 500. An investment in the stock market comes down to this: It's a "bet" that corporate profits will rise. Based on the historical evidence, it's a pretty good wager. Not a guarantee by any means, but one where you hold house odds. Still not convinced? Maybe you're saying to yourself that just because corporate earnings rise in most years doesn't mean there aren't years in which they fall. True enough. But over the last century, business profits in the U.S., Western Europe and Japan have increased in far more years than they have decreased. And that's because the economies in the developed countries have expanded at a fairly steady pace with only an occasional setback from recessions. Click on the "gross domestic product" (GDP) button, and you can see clearly that U.S. corporate profits have increased because the overall economy has increased. According to the Bureau of Economic Analysis data, corporate profits, on average, represent 9.3% of the GDP. The ratio fluctuates from year to year (partly because some corporate profits come from overseas operations and thus depend on foreign economies). But over long periods of time, you can expect profit growth will match the growth in the economy. And that means stockholders with a good mix of companies are more likely than not to make money.