I have been getting more and more investment related questions the last few months, especially since the market has bounced around without actually going anywhere. Broadly speaking, there are four things that affect your returns:
1) Over the long term, by far the most important metric is profitability and corporate earnings growth. If a company doubles their profits, you can probably bet their stock price goes up, too. We usually express this valuation of a company in a price to earnings ratio, with the overall US stock market currently priced at 21-22x next year’s expected earnings. On average, companies tend to grow their earnings by 5-10% per year, but guidance for 2026 is over 15%.
2) On a day to day basis, the markets digest and price in new information about the world. Companies increase earnings estimates for next year? Prices probably go up. The US going to war with a new country? Prices probably go down. In other words, the overall level of optimism or pessimism can affect prices and drive valuations higher or lower. This is a topic for another day, but the more pessimistic people are, the higher the next year’s returns tend to be!
3) One of the more obvious drivers of returns are dividends and stock buybacks. On average, this generally amounts to 2-4% per year. You might want to try to squeeze more out by investing in high dividend companies, but this strategy has wildly underperformed the index for a long time. Why? A high dividend yield signals that the company doesn’t have great growth prospects, so returning cash to shareholders is the best use of their money.
4) The last and least obvious driver is currency fluctuations. The US Dollar weakened 10% against the rest of the world in 2025, so international stocks did much better than the US for the first time in a very long time. FYI- a strong/weak dollar is not a good/bad thing. A strong dollar means we get better prices on imports, and a weak dollar means we get better prices on exports. That’s it. Don’t let politicians or news channels feed you bullshit.
Short and sweet this week. Time to get ready for Miami, where I absolutely plan to Make Life My Beach.
Resources
How To Avoid The Middle Class Tax Bomb
Make Life Your Beach
Memento Mori