Where Do Investment Returns Come From?

Posted on Monday, September 19th, 2011

Part I

O.K.  I know my third grade English teacher would cringe at the grammar, but I hope it gets the point across.  But have you ever pondered the question?

Historically, capital markets have provided positive returns.  But why?  Risk is not the only answer.  There are plenty of types of risk that don’t produce positive outcomes.  Certainly, some types of investment risk can explain differences in returns (stocks vs. bonds, small companies vs. large companies, etc.), but these risks in and of themselves don’t explain why there are any returns at all.

Sometimes the investment community gets so lost in minutia that the larger picture is often lost.  In the end, investing is the process of capturing the positive outcomes of the human effort as we go through life.  Sounds noble?   I think it is.  Now, I know there are many types of returns besides financial returns, but investing is focused primarily on the financial aspect of the global human effort.

Do people add value?  I contend that without people, there is no value in a commodity or a business.  It’s the application of the human element to these things that ultimately produce the value that’s reflected in the financial markets, and that’s what we try to effectively capture for you.

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