The skewedness of stock returns
An excerpt from a New York Post article by Ryan Vlasteclica
08 May, 2017
Stock picking is notoriously difficult, with almost no investors able to develop portfolios that can outperform the market over the long term. But few may realise just how hard it is to find a winner.
While the overall stock market tends to rise over the long term — posting better gains than both bonds and cash, albeit with greater volatility — the bulk of this move is driven by a few names that do very well, essentially lifting the overall market.
The average stock, when taken individually, not only underperforms when compared to the overall market, but also may even lose out to Treasuries (bonds).
That assessment comes care of Alpha Architect, an investment firm that looked at research by Hendrik Bessembinder, a professor at Arizona State University.
According to the data, which spanned the time period between 1926 and 2015, only 47.7% of all monthly stock returns were larger than the one-month Treasury rate. A mere 42.1% of stocks beat the return of T-bills.
According to Bessembinder's data, a very limited number of stocks do the heavy lifting for the market overall, and only one in 10 stocks posted a return that is twice as strong as the overall market. Bessembinder claims a mere 10 companies account for 16.26% of all the wealth that has been created in the stock market. As in, ever.
Fisher Funds comment: As dedicated stock pickers for nearly twenty years, we are not at all surprised at the results of this research. Obviously we don't pick stocks at random, and research can improve our odds of picking winners; but in all our portfolios we have experienced the phenomenon of a handful of stocks contributing the lion's share of returns. Unfortunately, it is rarely obvious at the beginning of a period which of the portfolio are going to be the best performers over time. Hence our insistence on diversification and constant monitoring of every portfolio position!