Sir Isaac Newton came up with the rule of physics that what goes up must go down. As a law of physics, it makes perfect sense. As a rule for investing, it is backwards! Markets have an upward bias that should be of great concern to the experts known as perma bears due to their constant belief that markets are about to fall.

The reasons behind the upward bias are pretty simple. First, the mere effect of inflation (the Motel 6 no longer rents their rooms for $6!) points to the likelihood that assets will cost more over time. So, without any real return at all, your investments are likely to go up in nominal terms.

Second, most businesses turn a profit most of the time. As a result, they are likely to grow whether that is in cash or other assets. Few businesses take all profits out by way of dividends or other distributions. So, the enterprise tends to grow over time. If you have a finite number of shares and a growing net worth, it certainly makes sense that the shares will appreciate over time.

Besides the above two factors, businesses tend to use the additional assets to grow and earn more and are always looking to increase productivity and therefore profits. So while many are disappointed over the current growth rate and the expected rate of growth going forward, any growth would tend to increase the value of enterprises.

The wildcard in this is current market valuations. When markets are overpricing assets, they are likely to correct towards the norm. The past decade has seen very little market appreciation as we entered 2000 with markets far more expensive than the norm. When markets are extra cheap (in comparison to the norm), we are likely to see excess returns going forward.

We could make the case that markets are nowhere near as overpriced as they were in the year 2000, but are not selling at bargain prices either. So, returns moving forward may be somewhat muted if economic growth does not speed up. However, while the market may suffer large falls periodically, the overall direction remains up. It is just a simple matter of anti-physics!