Hendrik Bessimbinder has produced some of my favorite stock market research.
Bessimbinder found that four out of seven U.S. stocks have underperformed cash (one-month Treasury bills) since 1926, and the overall stock market wealth growth over that period came from just 4% of companies.
In the long run, the stock market follows a power law.
Of course, some stocks will perform well in the short term, but Bessimbinder’s research highlights the benefits of diversifying your investments to generate big gains over the long term.
In a newly published research paper, Bessimbinder takes a more detailed look at the individual stocks that recorded the biggest gains in market history.
The statistic that stood out to me most in this study was this:
Going back to 1926, the average cumulative return is nearly 23,000%, a truly staggering figure. However, the average stock cumulative return during that time was -7.4%.
That’s a massive spread.
Remember, the median is simply the middle number of the group, meaning that more than half of all stocks have experienced negative returns.
The fact that the average return is so high reinforces Bessim Binder’s earlier work on *jargon alert* positive bias in the stock market, which indicates that the best-performing stocks experience outsized returns relative to the rest of the market.
Most stocks are no good in the long run, but the ones that make the most money more than make up for the losses.
Further notable data include:
17 stocks had cumulative returns of over 5 million percent. The annualized returns of these big winners were lower than expected, averaging 13.5 percent per year. Time in the market, etc. Altria was the best-performing stock over the entire period, with an annualized return of 16.3 percent from 1926 to 2023. Nvidia had the highest annualized return of any stock with at least 20 years of data, at 33.4 percent per year. Only 38 stocks survived the entire 98-year period studied.
The biggest winners over the long term are:
There are some surprises on the list, but most are names of blue-chip companies, which is probably what got them to become blue-chip companies in the first place.
Here are a few points to note:
There’s a reason index funds are hard to beat, and SPIVA’s annual scorecard nicely proves the concept in Bessimbinder’s data.
The stock market is hard to win because it’s hard to pick winning stocks. Index funds hold winning stocks.
Winners > Losers. Index funds also hold losers, and there are a lot of them.
But the winners have made more than enough to make up for the losers.
That’s the beauty of the stock market.
Compounding over a decade is magic: there are no long-term stocks that will earn you astounding 20% or 30% returns per year for 80-90 years.
From 1926 to 2023, the S&P 500 gained 10.3% per year, so it’s not as if the best-performing surviving companies crushed the market all at once.
But above-average returns have compounded over 98 years, producing phenomenal growth over that time.
That compounding effect has been magical for the stock market.
References:
Power Law in the Stock Market
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