Any good economist will tell you that, if you have a sufficiently long time horizon, stocks are a very good investment.  Indeed, my colleague Jeremy Siegel used that sentiment as the title for his excellent book  Stocks for the Long Run  Investing is stocks is a wonderful idea if you have plenty of time and sufficient discipline.

To be more specific, you can expect diversified stock investments to be the best performing asset class over very long periods.  Let me offer two justifications for that expectation.

First, it is borne out by history.  A great deal of empirical research shows that stock investments have handily beaten their alternatives over almost all long periods that are examined.  While Professor Siegel’s book is a fine place to review this data, there are lots of others.  It has occurred with enough consistency to inspire confident anticipation of similar results in the future.

The second lies in understanding the nature of stock investing. A share of stock is a fractional ownership interest in a company.  A company, in turn, is an enterprise whose objective is to create profits.  That’s what they do; try to make money.  Of course, not all such enterprises succeed.  Many a company has failed in the past and we can expect the same in the future.  Most companies, however, succeed in their goal of generating earnings.  Furthermore, notwithstanding those that go bust, the aggregate of all companies do succeed, achieve profit, and make their owners richer.  Taking part by purchasing a partial ownership of such firms is probably the best way to invest.

Let’s consider the primary alternative to stock investing as being bond ownership. A bond, of course, is a debt instrument.  It is essentially lending your money to an enterprise in exchange for interest and the promised return of your capital (or purchasing those rights from another lender).

At a very basic level, the two general ways to invest are to buy an ownership interest in a firm or to lend money to such a firm or other institution.  Which is expected to be the better investment over long periods of time?  Consider a single imaginary company that we will call Makemoney Inc.  Are we better off owning a part of Makemoney or lending to it?  The firm is run by people determined that it should succeed in making profit and creating wealth.  This goal is not only their duty but is also very well aligned with their own personal interests.  Any profit made belongs to the owners of the company.  Buying Makemoney’s stock is an investment in a share of those expected profits.

Buying a bond issued by Makemoney, on the other hand, amounts to lending the company money.  It is an investment in the promised interest and return of capital made by the company and safeguarded by those who run it.

The managers of Makemoney Inc. anticipate using borrowed money to make profit in excess of the cost of that borrowing.  To put it plainly, they would not borrow at 5% unless they expected to make at least 6% with that money.  Their intention must be to profit more than the cost of borrowing.  It is always possible, of course, that the managers of this one firm will misjudge or make a mistake.  In the aggregate, though, there is every expectation that companies will make greater profit than what it costs them to borrow.  As a result, you can have confidence that owning part of the company is wiser than lending to it over the long term.

The possibility of making an unwise or unlucky choice can be disquieting.  What if the particular company you select is among the few that do not profit in excess of borrowing costs?  That danger, and the anxiety it creates, can be successfully managed. Diversifying risk by buying ownership in many companies greatly reduces this vulnerability.  The broader the diversification, the less likely becomes the anomalous outcome.  And while diversification is big topic worthy of further discussion on another day, it serves here to remind us of the ease with which we can place our eggs in many different baskets.  A few simple actions can dramatically increase your confidence in obtaining the expected outcome of investing in profitable firms.

We can have great certainty that, over the long run, equities are likely to be the best class of investments.  If you have the time, stock investing can be sublime.