Where Does Growth Come From?

Photo by micheile henderson on Unsplash

I wrote this piece for one of my client newsletters in 2022.  The principles aren’t unique to that year, they are timeless, in a sense.  Hopefully, this will always be a reminder of why we benefit from growth and where it comes from.

Why do investments grow?  In a year when many asset values from stocks, bonds, gold, and Bitcoin are down (are gold and Bitcoin really investments?), we are bound to ask when growth will resume.  Since we can’t know with certainty when that will happen, I wanted to explore why it happens in the first place.

Inflation has become an ugly fact of life in 2022.  It’s nothing new, but this year brought a rise in prices we haven’t seen in most of my lifetime.  Inflation is one of the factors that leads to increases in revenue and profits for companies.  All things being equal, higher prices result in more revenue and profit for businesses. But runaway inflation can have the alternative effect of hurting revenues and profits in the long run.  Inflation is not the only driver of higher revenues and profits.  Afterall, if you only keep pace with inflation, we aren’t really growing, are we? 

Population is another factor that drives growth over time.  As populations grow, companies have larger markets to sell their products and services.  This is true on a large scale and much smaller scales.  What I mean is that a growing global or national population naturally means markets are bigger.  But a population that stays the same can still grow their consumer markets by creating greater access to those markets.  What does that mean?  Think of the exposure the person at the gas station has selling vegetables versus the person selling at the farmers market versus the person selling at Kroger.  Markets grow as freedom and ability to access those markets grow. 

The greatest driver of growth over time (in my opinion) is technology.  Advances in technology have resulted in substantial benefits to overall quality of life for centuries.  Businesses are a vehicle that bring these advances to the market and are thereby rewarded for it.  This too results in higher revenues and profits over time.  Think of the dramatic shifts in productivity and value creation that came with these innovations: printing press (1455), steam engine (1765), photography (1826), telephone (1876), light bulb (1878), automobile (1885), television (1927), nuclear power (1942), personal computers and Internet (1974), artificial intelligence (2017).

These improvements in technology mean that we can do more with less and create new products and services altogether.  This quarter I’ve shared with many of you a picture that shows the growth of earnings for companies over time.  This growth in earnings is fundamental to growth in the value of businesses over time.  Which is why I’ve referred to companies the most in this writing. 

We realize growth through interest paid on bonds, CDs, fixed annuities, and savings accounts.  And we can see the price of things like gold and bitcoin increase (and decrease substantially).  But companies, over time, have reliably provided both income through dividends and growth through innovation making them the cornerstone of a long-term, growth-oriented investment portfolio.

Any opinions are those of Landon Vick and not necessarily those of RJFS or Raymond James. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete; it is not a statement of all available data necessary for making an investment decision and it does not constitute a recommendation. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional. Be sure to contact a qualified professional regarding your particular situation before making any investment or withdrawal decisions. 

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