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Do Stocks Outperform Bonds?

Jonathan Swanburg
By: Jonathan Swanburg
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In a study of over 26,000 equities from 1926 through 2015, only 4% of listed stocks were responsible for the overall net gain in the U.S. stock market. The other 96% collectively matched one-month Treasury bills over their lifetimes.

The above quote comes from this ThinkAdvisor interview with Professor Hendrik Bessembinder, the author of the academic paper, Do Stocks Outperform Treasury Bills?

If you only ever read one academic paper on stock investing, let it be this one. The article makes several amazing observations:

  • Fifty eight percent of CRSP common stocks have lifetime holding period returns less than those on one-month Treasuries assuming the reinvestment of dividends. [CRSP is short for the Center for Research in Security Prices. Their database consists of the monthly stock returns of all common stocks listed on the NYSE, Amex, and NASDAQ exchanges.]


  • When stated in terms of lifetime dollar wealth creation, the entire net gain in the U.S. stock market since 1926 is attributable to the best-performing four percent of listed stocks, as the other ninety six percent collectively matched one-month Treasury bills.


  • Individual common stocks tend to have rather short lives. The median time that a stock is listed on the CRSP database between 1926 and 2016 is seven and a half years.


  • Rates of under performance are highest for small capitalization stocks, for stocks that have entered the database in recent decades, and for stocks that were initially listed on exchanges other than the NYSE.


What Do the Findings Mean for Investors?


First, while it is true that the stock markets as a whole, over long periods of time, are likely to generate higher returns than less risky asset classes like Treasury bonds, it is unlikely that any individual stock will do the same.

Second, the observations in the paper help explain why it is so difficult for active investors to outperform their benchmarks. In a stock investing landscape consisting mostly of losers, it is exceptionally costly to underweight or entirely miss out on the winners.


Is This Why I’m So Bad at Picking Stocks?


Humans love stock picking. They like to talk about them, analyze them, compare them and chart them in search of the best investment. If I’m at a party and describe myself as a financial advisor, the next question is inevitably something like, “What do you think of XYZ stock?”

My answer is always the same. “I have no idea.”

It is like telling someone I work at a roulette table and having them ask how I feel about the number 7. I may personally love the number 7 or I may hate the number 7. I may offer up how many times 7 has won in the last hour or explain how the other dealers feel about the number 7. None of it matters.

What does matter, according to Bessembinder’s research, is that while some stocks are exceptional, 96% of them are not. And for this reason (and what I wrote here about picking lottery stocks), it is critically important that an investor stays diversified if she wants to maximize her odds of long term, “Stock-like” returns.


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