Hopefully this is a relevant post to this board as it points to the importance of stock picking and growth stocks, I think.
Professor Hendrick Bessembinder of Arizona St. U recently published a study of stocks from 1926 to 2015. His findings: 58% of stocks under perform one month treasuries; since 1926, 4% of stocks account for the entire net gain in the stock market, and .33% account for 50% of the net gain.
There have been “super stocks” that have provided much of the gains, such as Exon, Apple, GE, Microsoft, Amazon.
Stocks overall outperform 10 year and 3 month treasuries but only because of the “super stocks”.
If interested, you can google his name and find the study and articles about him and his study.
I believe, hope, that some of the future “super stocks” are on this board. Thanks to Saul and all for the commentaries and analysis.
His findings: 58% of stocks under perform one month treasuries; since 1926, 4% of stocks account for the entire net gain in the stock market, and .33% account for 50% of the net gain.
He is looking at companies over their entire life. It seems, then, that most businesses have a finite life? Eventually most go to zero? You could also say that there is a 100% chance that you will die, eventually. So if you could invest in a person’s economic value instead of a stock, the value would eventually go to zero. However, in the prime of a person’s life, his economic value will probably have a period of great growth.
I’m not sure how practical or actionable this study is. With most businesses you can see when the end might be inevitable. You would probably think that Kodak might be in trouble with the advent of digital cameras. When you see a business category being disrupted would you continue to hold the stock or would you sell? You just want to invest in companies when they are in a period of growth.
It seems, then, that most businesses have a finite life? Eventually most go to zero? You could also say that there is a 100% chance that you will die, eventually. So if you could invest in a person’s economic value instead of a stock, the value would eventually go to zero. However, in the prime of a person’s life, his economic value will probably have a period of great growth.
Excellent analogy, Chris!
I’m not sure how practical or actionable this study is.
I didn’t even glance at the study, so I’m not sure what conclusions were printed. Mine are: you gotta find the super stocks! Yes you’re going to underperform if you pick the laggard companies, or the lumbering behemoths, or 96% of the junk out there – some of which were formerly great. You gotta get the right companies at the right times, as your wonderful analogy illustrates.
And why would we expect anyone else here to do the same?
Stock picking works… sort of. That’s the systemic nature of the stock market and of all markets as Vilfredo Pareto discovered over 100 years ago. That’s where the 80/20 rule comes from. That’s why three out of four mutual funds underperform the indexes. That’s why in a poker game there are more losers than winers. It’s not enough to be an above average stock picker, you have to be in the top quartile or top quintile to beat the indexes.
All these studies are limited. Take for example the recent studies that “diet drinks cause weight gain,” or “diet drinks don’t help diets.” Really? Yet they can find no link as to cause as to why this is.
I will tell you why, people who drink diet drinks tend to have weight problems to begin with more than the average population, and diet drinks cause a “moral” hazard in that people think if they drink diet they can eat or drink more other stuff that is highly caloric.
Not really difficult to figure out. Yet the experts spend millions of dollars constantly doing new studies that never really answer the question.
Here, in this study, YES, dominant businesses dominate the stock market. That is because stocks go up long-term when the underlying businesses create new value and grow. Only successful businesses do this, and only the most successful to this extremely well. And those businesses are rare.
Further, Wall Street is not stupid. Compare to Amazon to Ebay. Both are extremely successful companies. Both were valued extremely high when they IPOed. AMZN has managed to grow in spades beyond that valuation. EBAY is only now growing into its valuation.
So what. Pick and choose and invest in the best businesses, and you will find some of these winners. Period.
Either that or you can invest in t-bills at 1%. Further, since het market averages go up much faster than t-bills, the study is also non-sensical since you can easily beat t-bills simply by investing in index funds that buy the market.
All these studies are limited. Take for example the recent studies that “diet drinks cause weight gain,” or “diet drinks don’t help diets.” Really? Yet they can find no link as to cause as to why this is.
Going totally OT here for fun.
Your gut bacteria is critical to your health and bodily functions, though we did not really realize it until about 15 years ago. It is responsible for 70% of your serotonin production, which affects your brain. It is responsbile for up to 70% of your immune system. They now know that natural birth and breast feeding is important to establishing those colonies in infants, without that, they have many more health problems. They have shown in mice that doing a fecal transplant from a skinny mouse to a fat mouse, makes the fat mouse skinny and vice versa. When people contract C Diff (a bad bacteria), very often they can’t be cured by antibiotics, and in fact that can make it worse by killing off your good bacteria. But after months or years of trying everything, all the while having horrible poop episodes and pain every day, they have found that a fecal transplant from a healthy human can cure someone with in hours. Hours!!! Ok, so we have established that this little guys in the gut are important and can have large effects. So imagine a substance that throws off the natural balance, it could have side effects we don’t understand. What if artifical sweeteners made it to your gut and started growing bateria that was normally a tiny percentage and what if these new bacteria released chemical that made you crave calories.
(fiber is critical to feeding your gut bacteria, and not they are thinking that is why fiber helps prevent colon cancer, because it makes your bateria stong, not because it happens to do something directly to cancer cells)
Here is a podcast series I find fun and intersting. This episode is on the facts behind artificial sweetners. https://soundcloud.com/science-vs/artificial-sweeteners-not-… Low calorie, no calorie and so sweet. Artificial sweeteners just seem too good to be true. Is there a catch? We dig into two big questions: Do artificial sweeteners cause cancer, and are they making us fat? We talk to Prof. John Glendinning, Prof. Susie Swithers, Dr. Kieron Rooney, and PhD student Jotham Suez about the latest research
– if you are really intested, Google this “fecal transplant podcasts”
What if that sweet task triggered you vagas nerver or other part of a feedback system and made your body think it was getting calories. Then mabye you body gears up for the big calorie cascaded and nothing appears. Now these digestive chemicals are sitting around all bored and start telling your body to get some real calories down here ASAP? So maybe it can make you a bit hungry.
So two possible and not unreasonable mechanisms of action.
since 1926, 4% of stocks account for the entire net gain in the stock market, and .33% account for 50% of the net gain.
I looked into the study to see exactly what this means:
Only 4% of the companies that were listed in 1926 are still listed and have a positive return larger than treasuries. (This seems to exclude companies that went private and might have yielded a considerable return.)
Is this really surprising? Are any of you expecting Shopify to still be around in the year 2107? If not, does it mean you should not have invested in it?
I looked through the report. The section d. Outcomes by Delisting Reason starting at the top of page 12 deals with the issue of companies that did not exist at the end of the study (Dec 2016).
Panel B of Table 1B reports results for the 12,560 stocks that delisted due to Merger, Exchange, or Liquidation. In some dimensions these stocks outperformed stocks in the “Still Trading” group, reflecting that a departure from the database as a result of being acquired is typically a value-enhancing event. Specifically, 73.8% of stocks in the Merger, Exchange, or Liquidation group delivered positive lifetime buy-and-hold returns, and 63.0% outperformed one-month Treasury bills over their lifetimes.
And later, page 21: Consider, as a case in point, General Motors Corporation (GM), which delisted in June 2009 following a Chapter 11 bankruptcy filing. 26 The delisting share price for its main class of common stock was $0.61, down from $93 less than a decade earlier and $23 a little over two years earlier. Had the delisting share price been zero instead of sixty one cents, GM’s lifetime buy-and-hold return would have been -100%. However, GM paid more than $64 billion in dividends to its shareholders in the decades prior to its bankruptcy and also repurchased shares on multiple occasions, and these funds were collectively used by investors for other purposes prior to GM’s bankruptcy filing. In fact, as I show below, GM common stock was one of the most successful stocks in terms of lifetime wealth creation for shareholders in aggregate, despite its ignoble ending.
What confuses me most about the study was how it handles inflation. Note also that the compounding forward eliminates any need for an inflation adjustment, as the final outcome is a dollar amount at one specific point in time. That quote is 100% of what it says on that subject. Even assuming whatever that means is valid, the numbers in Table 4 (which were the basis for what they said about GM that I quoted above) puts those GM dollars from 2011 in with dollars from 2016. To what degree they did the same thing to companies not as successful as GM is beyond me.