Most Stocks Fail
It has often been observed that stock market returns tend to come in concentrated bursts during short periods of time. For example, from March 1956 to March 2006, just ten stock market trading days accounted for 63% of the return.
In addition to very few trading days accounting for most of the return, very few stocks also accounted for most of the gain. A 2017 study by Hendrik Bessembinder, a professor at the Arizona State University School of Business, tracked the return of all U.S. stocks since 1926. It found that 4% of publicly traded stocks accounted for virtually all the excess return over and above the one-month treasury bill rate, which for the entire period was 3.4%. The excess return coming from only 4% of stocks represented $47 trillion.
Just 83 stocks provided 50% of the excess return, 50 stocks provided 40%, and 30 stocks provided 30%. The researcher relied on the CRSP database of stock returns at the University of Chicago’s Center for Research in Security Prices. He excluded mergers. For example, Mobil Oil’s return was excluded because it merged with Exxon to become Exxon Mobil. The highest single returning stock studied was Apple.
Data on global stocks is less reliable and covers a shorter period of time, but Bessembinder reported in 2019 that 1.3 % of global stocks from 1990 to 2018 accounted for all the net gain over US treasury bills.
Even the market winners suffered major drawdowns (periods of sharp price decline). For example, the biggest winner, Apple, suffered a decline of 74% in 1983, 80% from 1992-1997, 79% from 2000-2003, and 60% in 2008, with many other big drops. At the bottom in 2008, the price earnings ratio of Apple was far below that of the S&P500.
It is possible to interpret the Bessembinder work as either against or for index funds. Against index funds because it might seem pointless to hold so many stocks if only a few will be rewarding over the long term. For index funds because holding masses of stocks increases the odds you will have included the big winners. It is very difficult to identify the big winners in advance.
Bessembinder’s work was foreshadowed by a Paul Ormerod book entitled Why Most Things Fail. He wrote that of the top hundred companies in 1912 in the U.S., only nineteen survived in 1995. Twenty-nine went bankrupt and nineteen were bought out.
WRITTEN BY:
HUNTER LEWIS | CHIEF INVESTMENT OFFICER
