Most stocks under-perform T-Bills

[BWV]

Most common stocks do not outperform Treasury Bills. Fifty eight percent of common stocks have holding period returns less than those on one-month Treasuries over their full lifetimes on CRSP. When stated in terms of lifetime dollar wealth creation, the entire gain in the U.S. stock market since 1926 is attributable to the best-performing four percent of listed stocks. These results highlight the important role of positive skewness in the cross-sectional distribution of stock returns. The skewness in long-horizon returns reflects both that monthly returns are positively skewed and the fact that compounding returns itself induces positive skewness. The results also help to explain why active strategies, which tend to be poorly diversified, most often underperform.

https://csinvesting.org/wp-content/...inder-Do-Stocks-Outperform-Treasury-Bills.pdf

cool graphic here

https://wpcarey.asu.edu/sites/default/files/do-stocks-outperform-treasury-bills.pdf

 

[scottdave]

I would imagine, taking every stock in existence, there are a lot of losers out there. Considering that fact, picking one at random each month, I would almost expect mediocre or poor performance. I haven't finished reading the paper yet. Those are my initial ideas on the subject.

 

[Vanadium 50]

I am not surprised. Surprised that there is a difference in behavior between the average of a group of objects and any individual object? Why is that surprising?

 

[russ_watters]

@BWV do you have a particular thesis you'd like to discuss? Depending on one's perspective this could be a shocking problem or an obvious and unimportant factoid.

 

[BWV]

Just thought it was an interesting piece, it’s not that obvious, otherwise less people would try to pick individual stocks. If it is an obvious outcome of a collection of securities with positive-skewed distributions, the magnitude of the effect is interesting

 

[russ_watters]

Just thought it was an interesting piece, it’s not that obvious, otherwise less people would try to pick individual stocks.

I don't see why that would be true. People don't pick stocks randomly.

...it isn't clear to me that you understand what this factoid means(assuming I do!). The "shocking" take might imply that people shouldn't invest in the stock market because they can do a little better in t-bills, but the "obvious" take is that most companies that do poorly you've never heard of - because they do poorly - and you'd never invest in them either way. They also don't last as long or make or lose as much money as the "blue chips". So it shouldn't be surprising that there are a lot of them or that their influence is small.

This is basically just pointing out the difference between median and mean for stocks.

Is it more likely that Apple will generate a second trillion dollars in wealth or any other randomly chosen individual company will generate its first?

 

[BWV]

Yes, it is more probable that Apple could double its market cap (7% or so growth for ten years would do it),and generate another trillion dollars of wealth, than a random stock, which would on average have a market cap of a few billion dollars would grow to be the current size of Apple.

The implication of this piece is stated in the abstract - traditional actively managed portfolios with, say, 40-50 stocks are suboptimal as they risk missing one of the big right-tail names (say Apple ten years ago).

if you read the tables, the poor performance primarily comes from small cap stocks. Performance of the average large cap stock, as one might expect, is less skewed.

It’s also of economic interest, illustrating that only a few firms succeed in creating the competitive advantages to earn economic profits (that is returns in excess of their cost of capital).

 

[russ_watters]

The implication of this piece is stated in the abstract - traditional actively managed portfolios with, say, 40-50 stocks are suboptimal as they risk missing one of the big right-tail names (say Apple ten years ago).

"Suboptimal" is an odd word choice here. The entire point of diversification is that you don't know anything for sure. The most "optimal" strategy would be buying and selling one stock at a time - the best performing stock - for the smallest time increment you could accomplish that. You'd make billions of percent return per day! "Optimal" is just not an achievable thing, and the very point of diversifying and having a "portfolio" (of multiple stocks instead of only the one best stock there is) is based on that.

if you read the tables, the poor performance primarily comes from small cap stocks. Performance of the average large cap stock, as one might expect, is less skewed.

Right; Companies that have succeeded are more likely to keep succeeding than companies that haven't.