Economic inequality is widening. Is it okay to stay as you are? The concept of the "risk premium" that clearly separates the common people from the capitalists

The market moves up and down in the short term,but the long-term trend is consistent.

For example, the Dow Jones Industrial Average, which continues to hit new highs, has risen more than 150-fold over the 70 years since World War II, and apart from short-term fluctuations, the upward trend has continued.

We, as long-term investors, are betting on this consistent trend.

The clear difference between the “common people” and the “capitalists”

The factors shaping this trend are,“economic growth”and“risk premium”.

“Economic growth” literally means the economy grows and the fundamentals forming stock prices improve. On the other hand, “risk premium” means that stock prices are always discounted due to investor psychology that “the future is unknown.”the return added on top of economic growth.

A few years ago, the topic“Capital in the Twenty-First Century”by Thomas Piketty discusses this.

The book’s theme is “r > g,” that is,the rate of return on capital (r) exceeds the growth rate of the economy (g). Therefore, in a capitalist society, capital grows faster than the economy,and the rich get richer.

This is where inequality becomes a problem, but from this you can understand what it means. Those who do not own capital can only reap the fruits of economic growth, whereascapitalists earn fruits exceeding economic growth through compounding as time passes. In this sense,inequality widening is natural.

In other words,if we want to become economically prosperous, the clear answer is to aim to become capitalists. Stock investment is one of the primary means.

In fact, people who are considered “rich” consistently increase their money through stocks or real estate. Some run companies, but that can also be considered a form of “capital.”

Although there is also an aspect of using existing money to purchase these assets,they continue to grow their assets further in stocks and real estate. In other words, financial assets generate more money.

Conversely, what about the “ordinary people”?They work hard to increase their income. However, there is a limit in Japan at least, and generally it might be around 10 million yen. Moreover, as income tax is progressive, much of what they earn above that goes to taxes.

Even if you can save 2 million yen each year from 10 million yen, after 40 years of work you would have 80 million yen. If you have expenses like buying a house in the meantime, the amount left would be even less.

On the other hand, if you continue to invest 2 million yen annually and achieve an average return of 5%, the result would look like the graph below.

At first there is little difference, butafter 40 years the difference becomes 80 million yen versus 250 million yen. This is precisely the difference between the “ordinary people” and the “capitalists.”

Even if it were 1 million yen per year, it would be 125 million yen; at 2 million yen for 20 years, it would be 700 million yen. The latter would reach 1 billion yen when including retirement funds.

Considering this, for investors, the “2000-man-yen retirement problem” fades in importance. Moreover, capital continues to generate money even after retirement.If you have built capital by retirement, it will keep bringing infinite money in the form of dividends and rental income.

What I want to say is that, regardless of how much money we currently have,we should aim to become a capitalists as soon as possible. Fortunately, you can start stock investing with around 100,000 yen.

Recently, it has become easy to trade from around 1,000 yen using a smartphone.

In the first year or two, the results may not be obvious. That is normal. However,if you accumulate for 10, 20 years, the difference becomes stark. Therefore, it is important to start as early as possible.

The common people’s desire not to lose leads the capitalists to greater wealth

However, when recommending investing, a common objection always arises“I don’t want to lose money”. Actually, this is precisely the source that brings even greater wealth to capitalists.

People instinctively seek to avoid losses. And they will inevitably shy away from investments where losses may occur. As a result, assets like stocks are discounted from their true value.

This “discount” is the risk premium described above. In other words,the very growth potential of stocks is undervalued by people, so when growth occurs, those who invested in stocks recover the discount and obtain returns beyond the growth.

This is the decisive difference between ordinary people and capitalists. In the numbers above, the 2% difference between 5% and 3% is the risk premium.

The idea that taking on what others avoid yields profits applies to business as well. Recently, as many people have come to dislike physical labor, the wages of construction workers have risen considerably. In areas with few workers, conditions are especially favorable.

Conversely,because many people do not gravitate toward investing, investors can obtain the risk premium. I want as many people as possible to invest, but if everyone were to invest, the profits for investors would shrink. This is a dilemma.

However, since people cannot go against their instincts, I believe such a situation will not occur. The risk premium will continue forever. Therefore,we long-term investors can invest with a sense of security.

No Risk, No Return

Keeping this in mind, I will continue to invest today as well.

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