Why does the stock market scare people?

Published in The Sunday Times on 22nd June 2025.

I’ve been a long-time advocate for stock market investing. It’s an uncontroversial stance - as any chart of global equity returns show they have been an unbelievably powerful wealth machine. But the stock market scares people. 

A new report from Michael Mauboussin attests that the most common, and legitimate, objection to investing is the risk of capital loss. 

Using data from 1985 to 2024, he shows the maximum loss for the US stock market was 58%. The time between its peak value to its trough was 17 months. And the time to recover back to par, was just over 4 years. That’s tough going. 

When you consider the data at individual company level, it’s another level of scary all together.

Individual company data is another level of scary

The median loss for the 6,500 individual companies analysed was 85%. The median time to recover back to par was 2 and a half years – for those stocks that did recover their losses. But 54% of stocks never return to par after hitting bottom. That’s tough on an unbearable scale.

The performance of individual companies is heavily skewed, most of the wealth created is from a miniscule number of stocks. In a separate study of over 28,000 public companies that have been listed in the U.S. from 1926 to 2024, 60% of the sample failed to match the returns of Treasury bills, i.e. a risk-free return.  And a hardly credible 2% of the companies produced 90% of the aggregate wealth created by the entire stock market. 

And there’s a positive bias to these numbers, as the study was limited to companies that continued to trade after a drawdown, it excludes companies that went bankrupt. 

One of the hardest aspects of being a long-term investor is that even the best investments suffer large drawdowns. One of the greatest success stories of the twenty first century, Amazon, provides a salutary lesson.

Amazon is the poster child for individual stock success

Amazon, from its initial public offering in 1997, to end of May 2025, has compounded at just under 33% per annum. That’s over $2 trillion of wealth creation, transforming every $1 invested into $27,000. Yet Amazon shares dropped 95% from December 1999 to October 2001. Something that declines 95%, has first fallen 90% and then halved again. Hats off to any shareholder that held on through this and came out the other side.

Alongside being a staunch supporter for stock market investing, I’ve also been a longtime advocate of implementing this through a diversified fund. Amazon is cited as an example today because it survived, and thrived. The list of failures is legion. Pick stocks at your peril.

I think the Amazons of the investing world have created the false illusion that the stock market is one big casino.

The risk of capital loss is what preoccupies stock market decision making, yet the risk of permanent capital loss is only relevant at the individual stock level. Capital losses at the index level have always been temporary, unless we include Imperial Russia or Austria-Hungary, post-World War I.  

We know the stock market declines regularly; almost 15% on average each calendar year. But avoidance of the stock market, based on some notion of permanent capital impairment, is not well founded and comes at a potentially penal cost – if the chosen alternative is so-called low risk alternatives like cash or bonds. 

The US market has compounded at approximately 10% p.a. for the last century. After inflation, that’s over 6% p.a. in real terms. Inflation is the risk that should concern any long-term investor, not the prospect of having to endure temporary losses. 

The stock market scares people because of a misperception of risk

I think the reason why the stock market scares people is primarily because the risk of investing is portrayed incorrectly by the media, and misinterpreted by investors.

Seen through the prism of short-term capital loss, of course the stock market is portrayed as high risk. Seen through the prism of maintaining or growing purchasing power, the stock market has provided extremely reliable, and arguably low risk in this context. 

Ice hockey provides a great analogy

There’s a wonderful analogy here with the ice hockey strategy of pulling the goalie. This involves replacing the goalkeeper with an extra attacker near the end of a game when trailing. It’s a risky strategy as it exposes a team to letting in more goals. But quants have shown that this is not the appropriate way to judge the strategy. What matters is a team’s league points, which improve by pulling the goalie. But ice hockey managers don’t like it.

If the metric for risk is goals scored against, rather than league points, then ice hockey managers will throw away league points unnecessarily. Equally, investors concerned about short-term capital losses will inevitably eschew stock market investments – a misinterpretation that historically has had a very high opportunity cost.  

You don’t need to throw caution to the wind when investing in the stock market. But you do need to throw faulty notions of risk and overcome fears of market drawdowns, which have always proved temporary.   
 

Source: Data is sourced from Bloomberg as at market close 31st December, returns are based on total indices in local currency terms, unless otherwise stated.

Gary Connolly is Investment Director at Davy. He can be contacted at gary.connolly@davy.ie or on X at @gconno1.