Greed goeth before a fall - in the markets

[WendyBG]

https://www.nytimes.com/2026/07/03/business/stocks-investing-markets.html

The Hottest Stock Markets Lead to the Biggest Losses

Investor enthusiasm culminated in some of the worst cases of wealth destruction in the last 100 years, a long-running study shows.

By Jeff Sommer, The New York Times, July 3, 2026

WorldCom, Lucent Technologies, Wachovia and Rivian Automotive: These companies are members of a dubious group, the worst stock market investments of the last century.

That lowly status is documented in a long-running study that has gotten far more attention for its depiction of the century’s best stocks. But it suggests that the most dangerous times for investors are when the market is high — and we may be in such a time right now.

The study, by Hendrik Bessembinder, a finance professor at Arizona State University, shows that most of the biggest losers since 1926 were tech companies. They included stocks that boomed during the dot-com era and in the halcyon days just before the financial crisis that began in 2007 — and many crashed when those boom cycles ended…

I’ve mentioned just a few of the firms with poor stock market performance. The companies at the bottom of the heap all had different characteristics. What they had in common was that their bad share performance occurred after their stocks were hot. First, they attracted enormous amounts of investor cash. Then the value of the shares evaporated…

Perhaps the most significant lesson is that price really matters. That may be worth pondering now, with widespread enthusiasm for artificial intelligence driving the prices of popular stocks to new heights.

Companies may be wonderful in concept and execution — and free of scandal — but even that is not enough. If their price is too damn high, exciting companies won’t create wealth for investors. They will instead end up in the annals of terrible wealth destroyers. [end quote]

cf. the books “Manias, Panics and Crashes” and “1929” and “This Time is Different.”

Here is the link to the study described in the article.

Do Stocks Outperform Treasury Bills | ASU W. P. Carey

Do stocks outperform Treasury bills?

Research by Hendrik Bessembinder, professor and Francis J. and Mary B. Labriola Endowed Chair in Competitive Business at ASU’s W. P. Carey School of Business, evaluated lifetime returns to every U.S. common stock traded on the New York and American stock exchanges and the Nasdaq since 1926.

Key findings

“The results also help to explain why active strategies, which tend to be poorly diversified, most often underperform,” says Bessembinder, who found that the largest returns come from very few stocks overall — just 86 stocks have accounted for $16 trillion in wealth creation, half of the stock market total, over the past 90 years. All of the wealth creation can be attributed to the thousand top-performing stocks, while the remaining 96 percent of stocks collectively matched one-month T-bills. [end quote]

Wendy

[Goofyhoofy]

RCA stock went from $114 in 1929 to $2.65 in 1932. And it was the “tech darling” of the day

Just sayin’

[intercst]

@WendyBG

“The results also help to explain why active strategies, which tend to be poorly diversified, most often underperform,” says Bessembinder, who found that the largest returns come from very few stocks overall — just 86 stocks have accounted for $16 trillion in wealth creation, half of the stock market total, over the past 90 years. All of the wealth creation can be attributed to the thousand top-performing stocks, while the remaining 96 percent of stocks collectively matched one-month T-bills. [end quote]

That’s why simply buying & holding an S&P 500 index fund through thick and thin (which grew more than 20-fold over the past 30 years) beats almost every other investing strategy – and it’s open to everyone, no matter where you live in the country.

The average American isn’t getting that kind of return on bonds or real estate.

intercst

[pauleckler]

RCA also had quite a run in the ‘80s before GE acquired it. I know people who did very well with it. They were a major employer in the Princeton, NJ area w both a satellite mfg plant in East Windsor and the Sarnoff labs. The name was spoken w reverence.

In the ‘70s when I was a beginner, my profs said don’t worry abt the DJIA. Find a winning stock, buy it again and again and hang on for dear life. For him that was Merck. A friend did RCA. For me it was Nvidia. This strategy can work very well if you find the right stock.

[captainccs]

@WendyBG

says Bessembinder, who found that the largest returns come from very few stocks overall — just 86 stocks have accounted for $16 trillion in wealth creation, half of the stock market total, over the past 90 years.

Bessembinder rediscovered the Power Law Distribution a.k.a. the Pareto Distribution.

GoogleAI:

Professor Hendrik Bessembinder’s landmark research on equity market skewness empirically validates that long-term stock market wealth creation follows an extreme Power Law (Pareto) Distribution, where a minuscule fraction of companies generate the overwhelming majority of aggregate market returns. [1, 2]

The Core Research Findings

• The “86 Stocks” Statistic: In Bessembinder’s earlier analysis spanning from 1926 to roughly 2019, just 86 top-performing companies (less than 0.3% of all listed stocks) were responsible for $16 trillion in wealth creation, representing half of the total net gain of the U.S. stock market. [1, 2]
• The updated 100-Year Data: In his updated March 2026 paper tracking 29,754 U.S. stocks from 1926 to 2025, total net shareholder wealth creation grew to $91 trillion. [1]
• Narrowing Concentration: The updated data shows that the market’s power law has become even more extreme: now, just 46 stocks account for half of that $91 trillion in total century-long wealth creation. [1, 2]
• The 4% Rule: The best-performing 4% of listed companies explain 100% of the net wealth generated by the entire U.S. stock market since 1926. [1, 2]

The Fate of the Other 96%

• Dead Weight: The remaining 96% of stocks collectively just matched the returns of a one-month Treasury bill, offering no premium for taking on equity market risk. [1, 2]
• Negative Median Return: Over a 100-year horizon, while the cross-stock mean buy-and-hold return is over 30,000%, the median stock actually returned -6.9%. [1]
• Wealth Reductions: Long-term investors in nearly 60% of all individual stocks ended up incurring net wealth reductions. [1]

What This Means for Investors

• The Needle in the Haystack: Finding the individual mega-winners in advance is mathematically highly improbable for the average stock picker. [1, 2]
• Case for Broad Indexing: Missing out on just a few of those 46 to 86 mega-winners means an active portfolio will drastically underperform the market. [1, 2]
• Buying the Whole Haystack: Passive indexing guarantees that you own the tiny percentage of “superstar” firms that drive 100% of the market’s net upside. [1, 2]

Harry Markowitz devised a system to deal with the above, Modern Portfolio Theory (MPT)

GoogleAI:

Modern Portfolio Theory (MPT) is an investment framework that allows risk-averse investors to assemble an asset portfolio that maximizes expected returns for a given level of market risk. Developed by economist Harry Markowitz in 1952, it relies on strategic diversification rather than individual stock-picking to optimize portfolio performance. [1, 2, 3, 4]

Core Principles of MPT

• Risk and Return: MPT assumes investors are fundamentally risk-averse—meaning they will always prefer a less risky portfolio over a riskier one, provided the expected returns are identical. To take on more risk, investors must be compensated with higher expected returns. [1, 2]
• Diversification: The foundational “free lunch” of investing. Instead of analyzing securities individually, MPT dictates that an asset should be judged by how it impacts the overall portfolio. By combining assets that don’t move in perfect sync (low or negative correlation), overall portfolio volatility is reduced.[1, 2, 3]
• Systematic vs. Unsystematic Risk:
  • Unsystematic Risk (Diversifiable Risk): The risk unique to a specific company or sector. MPT practically eliminates this through a diversified asset mix.
  • Systematic Risk (Market Risk): Economy-wide risks like recessions or interest rate changes. This cannot be diversified away. [1, 2, 3]

The Efficient Frontier

The mathematical visualization of MPT is known as the Efficient Frontier. It is a curve on a graph where the horizontal axis represents risk (standard deviation) and the vertical axis represents expected return. [1, 2]

• Optimal Portfolios: Points that fall along the upper curve of the frontier represent portfolios that offer the absolute highest possible expected return for a specific level of risk. [1, 2, 3, 4]
• Suboptimal Portfolios: Portfolios that fall below or to the right of the curve are considered suboptimal because they yield lower returns for the amount of risk taken. [1, 2, 3, 4, 5]

Limitations and Criticisms

While revolutionary, MPT is often critiqued in real-world application:

• Relies on Historical Data: MPT assumes that an asset’s past volatility and correlation will continue into the future, which is not always true during market shocks. [1, 2]
• Normal Distribution Assumption: MPT calculations often assume market returns follow a normal bell curve, underestimating the likelihood of extreme “black swan” events. [1, 2]
• Correlation Shifts: During severe bear markets, assets that typically have low correlation can suddenly become highly correlated, momentarily weakening the benefits of diversification.

My criticism of Modern Portfolio Theory is that you buy losers to offset your winners. The extra trading makes brokers rich. The simple alternative is to buy index funds.

How about covered calls? The downside is that if the stock skyrockets and you can’t roll up & out you have an opportunity loss, not a real loss. The upside is that if the stock crashes you have a smaller real loss.

What I have found is that investing in technology, qua technology, is not a sound choice. Make sure the technology is producing positive cash flow. Companies cannot go broke as long as they can pay their bills. Global Crossing was a prime exhibit. It did everything right but the price of optic fiber dropped faster than Moore’s Law and Global Crossing could not cover the investment.

GoogleAI:

Your assessment perfectly captures one of the most vital rules of investing: innovation alone does not guarantee a return on capital. Technology must be treated as a tool to generate positive cash flow, rather than an asset whose mere existence builds value. [1]

The catastrophic collapse of Global Crossing in 2002 highlights exactly why this is true: [1]

• Massive Capital Expenditure: Global Crossing raised and spent billions to build a massive global fiber-optic network across four continents. [1, 2]
• The Deflationary Trap: Because of rapid advancements in optical technology, the cost of laying and operating fiber-optic cable plummeted at a rate that outpaced their revenue models. [1, 2]
• The Oversupply: The telecom market was flooded with capacity, leading to a severe price collapse. Despite creating state-of-the-art technology, Global Crossing’s massive debt burden and dropping bandwidth prices meant it could no longer service its debt, ultimately leading to one of the largest bankruptcies in telecom history. [1, 2, 3, 4, 5]

To evaluate future technology investments safely and avoid similar traps, a sound strategy includes:

• Assessing Cash Flow: Prioritize free cash flow (FCF) over accounting profits.
• Unit Economics: Verify whether the specific technology reduces costs or drives real, recurring revenue for clients.
• Capital Discipline: Ensure the company is not relying on debt to survive industry downturns.

The above explains why I likeTesla,

ABBA - Money Money Money (Official Lyric Video)

The Captain

[DrBob2]

The forward P/E of the S&P500 is currently 20.4, lower than it was at the beginning of the year.

This surprising wrinkle in the 2026 bull market could drive stocks higher

DB2

[pauleckler]

This has been going on for a while. Nvida reports a 30% increase in earnings yoy and share price falls 20%. So PE falls.

The usual reasons are cited. Investors worry about AI. Will it grow earnings as planned or will it disappoint?

High prices make investors apprehensive. Are stocks fully valued? Or can they continue to grow earnings?

Can the most valuable company double in size? Or must it slow down? Will customers continue to buy more or will they decide they have enough?

Time will tell who is right.