I recently came across a fascinating, if slightly uncomfortable, piece of research titled Long-Term Shareholder Returns: Evidence from 64,000 Global Stocks (you can read it here). It examines thirty years of market history and reveals an awkward truth: almost all the wealth created by equities comes from a vanishingly small number of companies.
Of the 64,000 stocks studied, just 2.4% were responsible for all the net wealth creation. In fact, five companies alone (Apple, Microsoft, Amazon, Alphabet and Tencent) accounted for more than 10% of total global stock market wealth between 1990 and 2020. More than half actually underperformed U.S. Treasury bills, the dullest of all investments.
The study confirms what others have shown before: stock returns are profoundly skewed. The default outcome for a single stock is failure, not success.
But that doesn’t mean most businesses shouldn’t have existed, or that most investments were irrational. It depends on your perspective.
For founders, executives and employees (the people inside the machine) many of those businesses made perfect sense. They paid salaries, created jobs and produced goods and services that improved people’s lives. From the inside, these ventures were productive and worthwhile. It’s only from the viewpoint of outside passive investors that the picture looks grim.
Most companies simply don’t generate enough residual profit after paying everyone else to deliver strong returns to shareholders. Only the rare, dominant, high-margin businesses produce enough surplus to richly reward both shareholders and workers. These exceptional firms tend to share a few traits: they operate at scale, benefit from network effects, control valuable intellectual property or dominate an emerging niche.
One way to turn mediocre returns into respectable ones is through leverage, whether inside the business or applied to an investor’s position. As long as the spread between the cost of debt and total return stays positive, and you’re not forced to sell at the wrong time, it can work well. That’s essentially why residential property often delivers solid returns. But leverage cuts both ways and can backfire spectacularly when things go wrong.
So what’s an investor to do?
You could choose to own everything through an index fund and rely on that small handful of superstars to carry the load. There’s no shame in that.
But if you want outsized returns, you need to be exceptionally selective. And when you do find that rare company capable of compounding through cycles, keep it. Obsessively. Valuation will tempt you to trim, the news will test your conviction, and volatility will beg you to sell.
Resist.
The long-term mathematics of compounding are so asymmetric that selling too early can undo years of good decision-making. The best stocks often look expensive for most of their journey because the market chronically underestimates the durability of greatness.
And if it becomes clear that the potential you saw isn’t likely to be realised, as will usually be the case, you need to be disciplined enough to let go and try again. When a business consistently disappoints, there’s no virtue in patience. Markets are full of stories that sound promising but compound at zero. Cut them loose, reallocate, and move on.
Time and attention are limited; don’t waste them on mediocrity.
All of which is to say that an investor’s discipline must work in two directions: ruthless detachment when things aren’t working, and stubborn loyalty when they are.
So be fussy. Demand evidence of endurance, not just excitement. Cull the ordinary, cherish the extraordinary, and remember that patience with the right business is the rarest and most valuable edge in investing.
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