Why Equities?

The case for equities rests on three key ideas:

1. 1.Equities have delivered attractive long-term returns.
2. 2.Tilting towards certain factors/styles can improve those returns.
3. 3.The main hurdle is living with uncertainty and skewed outcomes — which you manage through time horizon, diversification and factor tilts.

1. Equities have delivered attractive long-term returns

Across many markets and time periods, equities have produced strong real (after-inflation) returns. Part of this comes from growth in underlying business value: companies reinvest earnings, innovate, raise prices and expand into new markets. Part of it comes from how those earnings are distributed to shareholders through dividends and buybacks.

The result is that, while year-to-year outcomes are noisy, the long-run track record of equities versus bonds, cash and commodities is compelling.

2. Tilting towards the right factors can improve the odds

“Equities” is a big bucket. Within it, some types of stocks have systematically done better than others. Over time, certain characteristics — often called factors or styles — have earned a premium:

• •value(cheap vs fundamentals)
• •quality(strong balance sheet, high and stable returns on capital)
• •profitability
• •size, momentum, low volatility(to varying degrees)

These premia are partly compensation for specific risks, and partly the result of persistent behavioural biases and institutional constraints.

By tilting a portfolio towards these characteristics — especially value and momentum — you aren’t trying to forecast every macro event. You’re shifting the long-term probability distribution of outcomes in your favour.

3. The real hurdle: uncertainty and skewness

The main challenge with equities is not that they don’t work. It’s that they don’t work in a straight line, and they don’t work uniformly across stocks.

a) Year-to-year returns are uncertain, but time horizon helps

In any given year, equities can be up a lot, down a lot, or flat. Over short horizons, randomness dominates fundamentals.

As you extend the holding period, three things happen:

• •the range of possible annualised outcomes narrows
• •the probability of achieving "decent" real returns rises
• •fundamentals and starting valuation matter more than noise

Equities reward patience and punish short horizons.

b) Individual stock outcomes are highly variable and skewed

The cross-section of stock returns is very uneven. A small minority of big winners often accounts for a large share of total market gains, while many stocks go nowhere or destroy value.

That means:

• •owning a handful of names is a lottery
• •diversification is essential to increase your chances of owning the winners
• •tilting towards favourable factors (value, momentum) improves the shape of the distribution you're drawing from
• •position sizing should prevent a few losers from dominating portfolio outcomes

The case for diversification extends to geography. Equity markets around the world have delivered positive long-term returns, but with meaningful variation between countries and regions.