From Pragmatic Capitalism:
Just passing along a good paper here from GMO explaining where equity returns come from and why the death of equities has been greatly exaggerated:
Where do equity returns come from? As questions go, it may not be quite as profound as “Why are we here?” or as embarrassingly baf?ing to most of us as “Why is the sky blue?”, but considering the number of people out there who spend their working lives dealing in the ?nancial markets, it is a question asked less often, and usually answered less well, than it should be.
This paper will not pretend to tell the whole story, but in a time when investors are questioning what role equities should have in their portfolios, it is worth understanding where the returns to equities come from, and why, after a 12-year period in which U.S. equity returns have been negative, we can still be con?dent that the returns will, after all, be there in the long run. We will begin with a summary of our basic points…