Skip to main content

96 Percent: Most Stocks are Bad Investments

Photo of Person Holding Black Pen

Hendrik Bessembinder, finance professor from Arizona State University studied stock returns from 1926 - 2016, looking at all public companies listed on the NYSE, AMEX, and NASDAQ. He found that most stocks are weak investments. Many not even strong enough to put up a fight against Treasury bills.

Stocks as a whole have generated tremendous wealth. The total US stock market is worth over $30 Trillion. However, Bessembinder discovered most stocks don't contribute much. Most are under-performers that piggyback of the performance of a few key players (like group projects in school).

Just 4% of companies account for all stock market returns. While the remaining 96% failed to have much of an impact, their gains and losses washing each other out.

Approximately 25,300 companies were studied and a small number of top performers account for a disproportionate percentage of the market's return.

# of Top Performing Companies
% of Market Return
5
10%
30
30%
50
40%
90
50%
1,092
100%

The top 5 wealth creating companies:

Top 5 Performing Companies
Market Capital 
1. Exxon Mobil
$1.002 trillion
2. Apple
$745.7 billion
3. Microsoft
$629.8 billion
4. General Electric
$608.1 billion
5. IBM
$520.2 billion

If you invested in these top performers early on, you would've made a tremendous return. But as we know, picking stocks is incredibly difficult. No one knows which companies will emerge on top in the next 30 years. They might not even exist yet.

The odds are heavily stacked against you. However, your odds of successful investing are strong when you forgo betting on individual stocks and bet on the market as a whole. With a total market index fund you'll be able to capture the market return. You end up buying up all the losers but you also own all the winners, who've shown they can more than make up for their weaker counterparts. Instead of looking for the needle in the haystack, do as John Bogle said and just buy the haystack. 



Comments

Popular posts from this blog

Today's Special: Humble Pie

You champion a project, fight for an idea, and then...reality sets in. That churning in your stomach isn't butterflies, it's the realization you've missed the mark.  Pride will puff up your chest, and kick in the "defend at all costs" instinct. But arguing with the umpire never changed a call. Admitting you're wrong isn't a sign of weakness. It can strengthen your professional standing. In a world obsessed with the illusion of infallibility, the courage to adjust course is a breath of fresh air. It shows you're confident enough to be wrong, and adaptable enough to learn from it. Do your research, think critically, and stand behind your decisions. But when the data whispers (or screams) otherwise, don't be afraid to swallow that slice of humble pie. Be the first to acknowledge. Don't wait for someone to point out your mistake. Be open, take responsibility, and most importantly, focus on what you're going to do to address it. Don't dwell ...

Negative Feedback, Positive Lessons

In the battle against plastic bags, a five-cent tax was shown to be much more successful at deterring usage than a five-cent credit for bringing your own bags. Carrots satisfy but sticks sting, and they sting hard. So we default to the less painful choice of avoiding loss. Loss aversion impacts the way we process information. A 2019 study  invited participants to learn through a series of multiple choice questions. Each question only had two options to choose from. Whether guessing correctly or not, they would still learn the right answer.  Despite the identical learning opportunity, participants were much more successful at recalling the answers they guessed correctly than those they got wrong.  "You're right!" feels good. We savour the moment, analyzing every detail.  "You're wrong!" stings. We want to quickly forget, dismiss, and move on.  When we succumb to loss aversion, we miss opportunities to learn. Failure is part of the process. We'll experie...

Starting Really Really Small

On your desk is one of the most intimidating sights known to man. A blank page. The prospect of filling it up with anything resembling decent seems insurmountable. Staring at the long road ahead fills you with anxiety and dread.  The first step is the most difficult. So we procrastinate. We " research ", we " prep ", we " plan ". We do everything except tackling the problem. We avoid the pain for as long as we can.  To make a blank page less intimidating. Tear it in half. There, half as scary, twice as easy. Still too much? Do it again. And again. Keep doing it until the task is so small that it's too easy not to do.  Getting starting is the hardest part. So make the hardest part as easy as possible. This doesn't guarantee amazing results, but it gets you in the game. You can't win if you don't play.