Betting on equities is essentially betting that human beings will become more productive over time. As long as societies innovate, improve technology and raise living standards, the value that corporations create compounds. Because of this underlying engine of progress, investing in equities is fundamentally a positive-sum game.
Equity ownership is, therefore, a claim on future human productivity. As long as humanity continues to progress, the resulting value creation ensures that equities, in aggregate, grow over long horizons.
The problem is that equities are not priced directly by productivity. They are priced by investors, people who constantly shift their views about how bright or uncertain the future looks. These changing expectations cause securities to be repriced continuously. Over the very long run, investors tend to get the fundamental value roughly right. But in shorter periods, the fluctuations become increasingly random.
Markets behave like a pendulum: they swing from overvaluation to undervaluation and spend surprisingly little time at equilibrium. Prices usually reflect mood, narrative and liquidity more than the slow-moving fundamentals of productivity that ultimately drive long-term returns.
At the same time, the lives of individual investors are multi-temporal. Although markets compound over decades, individuals experience their financial lives as a sequence of short-term windows. In the long run, there are dozens of short runs. And at any given moment, different investors begin at various points along both their personal life paths and the market cycle. One investor starts during a boom; another begins during a recession. Their outcomes, risk perceptions and emotional experiences diverge sharply.
John Maynard Keynes captured this tension succinctly in A Tract on Monetary Reform (1923):
"The long run is a misleading guide to current affairs. In the long run we are all dead."
This is why the theoretical perspective of positive expected value over the long term offers limited psychological assurance. It may be true mathematically, but individuals must live through the sequence of short-term volatility that separates today from that long-term outcome. The long run may be attractive, but people live and make decisions in the short run. Individuals must bridge the gap between long-term rationality and short-term uncertainty.