Well, are you all scratching your head with this news? The title alone should give us all reason to pause for at least a moment. If anything, it probably made you briefly question the stocks in your portfolio and maybe even your approach. It might strike fear into some of you too, especially those of you taking some risk in high beta stocks.
Arizona State University professor Hendrik Bessembinder led research for a comprehensive study of over 62,000 global stocks in 40 countries across the last 28 years. They found that 60% of them failed to match the return of one-month U.S. Treasure Bills. “WOW!” might be an acceptable first response.
“It is historically the norm in the U.S. and around the world that a few top-performing companies have great influence over how the market does overall. It’s the norm and I expect it to be the case in the future.”
ASU Professor Hendrik Bessembinder
From 1990-2018, his team found that global shareholder wealth increased by $44 trillion. And just 306 stocks, about 0.5% of the total (62,000), generated roughly 75% of that gain.
That is a drop the microphone moment. So if I’m only holding 20-35 stocks in my portfolio then I only need a few to drive most of my gains. I better pick the right ones and then hold onto them.
Some might think this makes a strong case for index mutual funds. But the problem with that is you are owning thousands of losers too. I like focusing on large, multinationals that are financially sound and have experienced recessions and leadership transitions. This reduces the likelihood of finding the losers.
But Wait, There’s More!
Professor Bassembinder released an earlier study in 2018. This one was focused on over 25,000 U.S. stocks from 1926-2016. So looking at this longer period (versus 28 years in the newest study), he found some similar results.
“When stated in terms of lifetime dollar wealth creation, the best-performing 4% of listed companies explain the net gain for the entire U.S. stock market since 1926, as other stocks collectively matched Treasury bills.”
ASU Professor Hendrik Bassembinder
He also found that more than half of the stocks delivered negative lifetime returns. Additionally, the largest returns came from a smaller group of stocks (86 total) that accounted for half of the wealth created in the 90-year period.
I would have never participated in this wealth creation with the prior way I was investing. Everyone thinks they have better system for creating wealth than the buy and hold method. Here’s the cool thing, the approach that I’m taking now will work for my kids too. Creating wealth in 28 years or 90 years – the principles are still the same.
So What Now?
You know most of the names already – i.e. Exxon Mobil, Coca-Cola, Johnson & Johnson, and more – so that makes your job easier. Sure you might miss out on the next Apple or Microsoft but you could have still purchased them later in their cycle with much less risk – basically once they’ve proven themselves.
“The results reinforce the desirability of having a well-diversified portfolio, which increases the chances that some of your stocks will become big performers, and of the buy-and-hold strategy.“
Quote From The Study
Many stock pickers choose their stocks from a stock screener. They put in criteria like 5-year earnings growth or forward price to earnings ratio to find their stocks. There’s nothing wrong with these criteria but it should only help you decide when to purchase. You should already know what stocks you should be looking at.
And this isn’t to say your can’t invest a small portion of your portfolio in mid-cap stocks that might be the next Apple. But you need lots of luck doing this. With 6 years left before I retire, I can’t afford to have “luck” as a significant approach to my portfolio strategy.
Final Thoughts
We must all draw our own conclusions to these studies. I’m drawn back to the reasoning and soundness of our Master Stock List. The list is a Who’s Who of companies that have a higher chance of driving your portfolio than some trading system or buying individual small/mid-cap stocks.
Here are some final thoughts:
- It’s likely that only a few stocks in your portfolio will drive most of your gains
- Trading is not the answer … you need to buy the right companies and make sure you hang onto them
- Though choosing the right stock is absolutely critical, the price you pay for those stocks can make a big difference in the wealth you create
- Most companies struggle to remain relevant for 28 (or 90) years let alone thrive or even survive
- It’s important to be diversified because you don’t know which sectors will lead the way the next 20, 30, or 90 years
- You can’t predict the future so you need to invest in companies that have some history (typically the large, multinationals)
Thanks for reading!
Mr. TLR