Are most stocks and shares really duds?
Let’s look at the evidence to support this statement.
The ongoing debate and research in the investment world continues to focus on whether its possible to find and select tomorrow’s winners i.e. which shares should you own and which shares will provide the best returns?
So, let’s ignore most of the useless marketing material and meaningless short-term data and take a dive into the latest and most rigorous research.
In 2017 Hendrik Bessembinder’s study of US stockmarkets from 1926 – 2015, arrived at two startling conclusions.
- From the beginning of the sample (1926) or first appearance in the data through the end of sample (2015) or delisting, and including delisting returns when appropriate, just 42.1 percent of shares had a holding period investment return greater than one-month Treasury bills (loans to US Governments) i.e. For 57.9 percent of shares there was no reward for taking the additional risk of investing in shares.
- Over their full life, less than half of shares had a positive lifetime holding period return, and the average lifetime return was -3.7 percent.
He summarised this as follows “The results here focus attention on the fact that poorly diversified portfolios may underperform because they omit the relatively few stocks that generate large positive returns.”
Bessembinder followed this study with another research paper in April 2021 “Wealth creation in the US public Stock markets 1926 – 2019” which he concluded with the following summary.
“…all investors should be aware that long-term stock market wealth creation has historically been concentrated in a few firms and that the degree of concentration has increased in recent years. There is no reason to think that wealth creation outcomes will not also be highly concentrated in the future.”
Then what’s the point of investing in stocks and shares, you might ask?
The answer is having a properly diversified portfolio rather than a poorly diversified portfolio.
Furthermore, a more recent study in May 2021 “Do stocks outperform treasury bills in international markets?” (Fang, Marshall, Nguyen and Visaltanachoti) covering the period from 1996 – 2017 and over 70,000 shares in 57 countries found.
- More than half the common shares in the majority (55 of 57) of international equity markets (Non United States) generated total returns that were less than local Treasury bill returns.
- The average cross-country proportion of stocks that outperformed was 42.4 percent i.e. the majority, 57.6 percent underperformed
What are the investment lessons?
Very few investors will be comfortable, or accepting, of extreme (either very good or very poor) investment experiences and the discomfort this may create. This research is further evidence of how difficult it can be to identify tomorrow’s winners (shares) in advance, but in reality, there is no need to adopt any such approach when you can have a successful investment experience by simply diversifying properly.
Although the research is evidencing that a majority of shares, in stockmarkets around the world, fail to provide an investment return greater than lower risk assets, do not give up on owning thousands of different shares.
Simply, put 1) the odds are in your favour and 2) own the widest possible portfolio of shares, within which you will be guaranteed to own the small number of shares which provide the majority of most stock market gains.
Proper diversification is said to be the only free lunch in investing!
For an even deeper dive into this topic see the brilliant Larry Swedroe research article.
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