As Uncle Warren (or Uncle Charlie) were wont to say, "investing is simple, but isn't easy", here's some sobering research about the returns of the US stockmarket over the past 100 years.
For those with the time, I've attached a link below to the research by Professor Hendrik Bessembinder, WP Carey School of Business, Arizona State University.
The TLDR which I've liberated from Stephen Clapham (Beyond the Balance Sheet - also linked below) goes as follows:
In the last decade, more wealth has been created in US equities than in the previous 90 years combined. And just two companies, Nvidia and Apple , account for 18% of that.
That sounds extraordinary. It should also make you slightly uncomfortable.
Because a new study by Hendrik Bessembinder, analysing 100 years of stock market data, reaches a conclusion that few investors fully understand:
Most stocks don’t matter.
Out of nearly 30,000 companies since 1926, just a tiny fraction created all of the net wealth to date. The rest collectively delivered little more than Treasury bills.
This isn’t a new idea. Bessembinder’s original work showed that returns are highly skewed. What’s new and striking is that the concentration is getting worse.
It’s probably worth a few comments on the original paper first, as it was quite revolutionary when it was published. The academic studied 25,300 companies over the period 1925-2016 and found that the distribution of that wealth creation was very skewed:
(Bessembinder defined wealth creation as a return above one month Treasury bills).
In his latest study, the population has enlarged somewhat (from 25k stocks to 29k stocks) but in both studies just under 1100 companies created 100% of the wealth.
In the last 100 years, 28k companies created zero wealth overall – the first 17.2k companies reduced wealth by $10.7tn, while the next 10.8k companies created positive wealth of $10.7tn, a net zero for the 28k total.
More wealth ($48.4tn) has therefore been created in the last 10 years than in the previous 90.
We are living in a golden age. (Or have been.)
The concentration of these returns has become even more skewed – just 4.3% of stocks in the first 90 years and 3.7% of stocks in the 100-year period created all the wealth.
The number of stocks which created half the wealth has shrunk from 89 companies in the first 90 years to 46 companies in 100 years. The number has roughly halved.
The database has 100 years of history but the mean and median life of a stock is just 11.7 and 6.8 years. It’s not all failures, of course. A few stocks only floated in recent years while many stocks exit due to acquisitioon or take private, as well as company failure.
Why Most Stocks Fail (And What That Means for Your Portfolio)