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Owning Individual Stocks : A Loser ’ s Game
Most stocks have reduced rather than increased shareholder wealth . By Larry Swedroe
WHILE WE ’ VE ALL COME TO UNDERSTAND the benefits of diversification when investing in U . S . equities , one economist , Hendrik Bessembinder at Arizona State University , has greatly contributed to our understanding of diversification , as well as the distribution of returns .
In 2021 , he published a study in the Journal of Investing called “ Wealth Creation in the U . S . Public Stock Markets 1926- 2019 .” Here he analyzed the long-run stock market outcomes , measuring the increases or decreases in shareholder wealth creation ( relative to a benchmark of T-bills ). In his analysis , he looked at the full history of both net cash distributions and capital appreciation . His data included all the 26,168 firms that had issued publicly traded U . S . common stock since 1926 .
In calculating the change in net worth , he explicitly accounted for new share issuances , share repurchases , and the fact that dividends are not ( in aggregate ) reinvested in the stock market ( share repurchases and dividends reduce market capitalization but do not decrease the calculated shareholder wealth creation ).
Bessembinder made a number of key discoveries :
• A majority of stocks led to reduced rather than increased shareholder wealth .
• Aggregate shareholder wealth creation has been concentrated in a relatively few high-performing stocks .
• The 86 top-performing stocks , less than one-third of 1 % of the total , collectively accounted for more than half the wealth creation . And the 1,000 top-performing stocks , less than 4 % of the total , accounted for all the wealth creation . The other 96 % of stocks just matched the return of riskless one-month Treasury bills !
• The degree to which stock market wealth creation has been concentrated in a few top-performing firms has increased over time and was particularly strong during the most recent three years of the study , when five companies accounted for 22 % of net wealth creation .
• The concentration of shareholder wealth creation is attributable to the fact that the distribution of stock outcomes over the long term is positively skewed ( positive skewness means distorted from the bell curve or normal distribution ). Since most individual outcomes in a positively skewed distribution are less than the average outcome , this implies that undiversified portfolios selected at random will underperform the overall market more often than not . This understanding should reinforce the idea that low-cost , broadly diversified strategies are both desirable and prudent .
New Research
Bessembinder published another paper in July 2024 called “ Which U . S . Stocks Generated the Highest Long-Term Returns ?” This time he analyzed the returns of the 29,078 publicly listed
42 | FINANCIAL ADVISOR MAGAZINE | SEPTEMBER 2024 WWW . FA-MAG . COM