Is only a small minority of stocks actually driving market gains?

“Quick, before you read this post, ask yourself these questions:

1. What percentage of stocks beat their benchmark index over their lifetime?

2. What percentage of stocks have a negative return over their lifetime?

3. What percentage of stocks lose essentially all of their value?

Not sure? The answers to all three questions are below.

 

When most people think of the stock market they do so in terms of index results. Popular indexes include the S&P 500 and the Russell 3000. However, most people are not aware of the tremendous differences between winning and losing stocks “beneath the hood” of a diversified index. From 1983 to 2006 over 8,000 stocks (due to turnover and delisting) were at some point members of the Russell 3000. The Russell 3000 Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market.

 

Key findings:

  • 39% of stocks had a negative lifetime total return (2 out of every 5 stocks are money losing investments)
  • 18.5% of stocks lost at least 75% of their value (Nearly 1 out of every 5 stocks is a really bad investment)
  • 64% of stocks underperformed the Russell 3000 during their lifetime (Most stocks can’t keep up with a diversified index)
  • A small minority of stocks significantly outperformed their peers (Capitalism yields a minority of big winners that all have something in common)

The database covers all stocks that traded on the NYSE, AMEX, and NASDAQ since 1983, including delisted stocks. Stock and index returns were calculated on a total return basis (dividends reinvested). Dynamic point‐in‐time liquidity filters were used to limit our universe to the approximately 8,000 stocks that would have qualified for membership in the Russell 3000 at some point during their lifetime.

 

Here’s the distribution of annual returns:

average stock returns

 

In fact, if you only held the bottom 75% of stocks, it turns out that you wouldn’t make any return at all.

The average (mean) return of a US stock is actually slightly negative.

Even a median return of 5.1% certainly isn’t particularly impressive for the time period we’re talking about.

So in terms of the market in total, the poor performance of the worst 3,000 or so stocks means that taken together, the bottom 75% haven’t returned anything at all — only the top-performing 25% of stocks actually drag the collective return into positive territory:

 stock returns

 

On one level, this isn’t particularly surprising. Of course a lot of stocks don’t have strong returns, and it’s in the nature of financial capitalism that some of them go bust. But it’s still quite striking just how top-heavy the distribution is — and it shows how much of a challenge stock-picking can be”.

 

Sources: http://www.businessinsider.com/clsa-charts-on-stock-market-gains-2015-11

http://seekingalpha.com/article/108867-the-capitalism-distribution-fat-tails-in-motion

Disclosure: This website contains the public articles, and this communication is for informational purposes only. Nothing herein should be construed as my opinion, solicitation, recommendation or an offer to buy or sell any securities or product, and does not constitute legal or tax advice. The information contained herein has been obtained from publicly available sources believed to be reliable but we do not guarantee accuracy or completeness. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional investment, legal, tax, or accounting counsel.

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