age P-Es and lower realized returns. “Although these returns may be di-
minished from the past,” he writes, “there is overwhelming reason to be-
lieve stocks will remain the best investment for all those seeking steady,
long-term gains.”
“[O]verwhelming reason” is an understatement. The risk pre-
mium earned by equities over the long run mustremain intact if the sys-
tem is going to survive. In the capitalist system, bonds cannot and
should not outperform equities over the long run. Bonds are contracts
enforceable in courts of law. Equities promise their owners nothing—
stocks are risky investments, involving a high degree of faith in the fu-
ture. Thus, equities are not inherently “better” than bonds, but we
demand a higher return from equities to compensate for their greater
risk. If the long-run expected return on bonds were to be higher than
the long-run expected return on stocks, assets would be priced so that
risk would earn no reward. That is an unsustainable condition. Stocks
must remain “the best investment for all those seeking steady, long-
term gains” or our system will come to an end, and with a bang, not a
whimper.
Peter Bernsteinxvi FOREWORD