In the the spirt of celebrating St. Patrick's Day today, here are some tidbits to chew on in between your green beer and corn beef.
While many times we think we know the truth, sometimes the truth is quite different from what we think it is.
Who St. Patrick wasn't:
Here's who he was:
In fact, many times the truth is stranger than what you might think. Let me explain.
The vast majority of the stock of individual companies since 1926 have returned less 1 month US-Treasury Bills.
Read that last sentence again.
How is this possible when the fact that stock markets provide long-term returns that exceed the returns of low risk investments, such as government obligations? This has been extensively documented for the US stock market as well as for many other countries around the world. We all have read that stock returns are greater than super safe US government bonds. That's why we invest in stock, to earn more than the low rates in savings accounts and short-term bonds.
So prepare for your mind to be blown away.
It gets even worse, the single most frequent outcome (when returns are rounded to the nearest 5%) observed for individual stock over their full lifetime is a loss of 100%. Read that last sentence again and let it sink in. A 100% loss is the most common outcome for individual stock.
The median time that a stock is listed is seven-and-a-half years. What does this mean? Companies don't last long.
The fact that the overall stock market generates long-term positive returns could be considered a puzzle.
While the majority of individual stocks fail to even match Treasury bills, the positive returns can be attributed to how the distribution of individual stock returns. The returns are positively skewed. Simply put, large positive returns of a very few stocks offset the majority of the losers.
The data shows that approximately 25,300 companies that issued stock appearing in the CRSP common stock database since 1926 are collectively responsible for lifetime shareholder wealth creation of nearly $35 trillion (as of December 2016).
However and amazingly, just 5 firms (Exxon Mobile, Apple, Microsoft, General Electric, and IBM) account for 10% of this total wealth creation.
So when you are done drinking your green beer and start thinking about which companies to invest in, keep in mind that "picking winners" is extremely difficult, so you better hope you have some luck of the Irish on your side.
- Paul R. Rossi, CFA
Here is a link to the published paper by professor Dr. Hendrik Bessembinder that this article references.
Paul R. Rossi, CFA