common stocks contained in the CRSP database held by the Center for Research in Security Prices ( at the University of Chicago ’ s Booth School of Business ). He looked at the stocks from the period of 1926 to 2023 .

In this paper , he made some new discoveries :

• On average , companies appeared in the CRSP data for only 11.6 years .

• The median lifespan of the companies in the database was just 6.8 years .

• Only 31 stocks were present in the database over the full 98-year period .

• Most of the companies ( 51.6 %) had negative cumulative returns . Most of the stocks destroyed value .

• The median outcome was a return of negative 7.41 % per annum .

• The mean compound return outcome was strongly positive , but the median outcome was negative . That difference , again , stems from the positive skewness in the distribution of compound stock returns .

• Even when the data was restricted to include only those stocks that had at least five years of history ( but not more than 20 ) most of the stocks still produced negative returns .

• Even among the 30 stocks with the highest cumulative compound returns , the results were relatively modest . The median annualized return across the 30 stocks was 13.03 %, while the mean was 13.05 %. The largest return was Altria Group ’ s at 16.29 %. How many investors would have guessed that one ?

His findings led Bessembinder to conclude : “ While very high annualized returns are observed in the historical data over relatively short periods , such dramatic returns have historically not been sustained over long intervals .” He added : “ The highest annualized returns attained by any stock are systematically lower among those stocks with longer lives .”

Investor Takeaways While investors have enjoyed a large excess return from the equity risk premium , a large majority of stocks have suffered a lower return than the investor would get for a risk-free asset . That shows just how much uncompensated risk is accepted by investors who buy individual stocks ( or a small number of them )— risks that could be diversified away without reducing expected returns . Those investors considering active strategies — in hopes of taking advantage of a positive skew in outcomes — are likely accepting lower returns in exchange .

The historical record suggests that the net wealth creation / destruction attributable to the overall stock market in the future will be concentrated in a relatively few firms . That means active management is unlikely to benefit from that concentration , and that the winning strategy is to avoid active security selection or market timing .

Mistakes

Investors make mistakes when they take idiosyncratic , uncompensated risks . They do so because they are overconfident in their skills , they overestimate the worth of their information , they confuse the familiar with the safe , they have the illusion of being in control , they don ’ t understand how many individual stocks are needed to effectively reduce risks that could have been diversified , and they don ’ t understand the difference between compensated and uncompensated risks ( some risks are uncompensated because investors could have diversified them ). These mistakes help us explain why investors aren ’ t diversified . Another likely explanation for their actions ( from the field of behavioral finance ) is the preference many of them have for positive skewness — they are willing to accept the high likelihood of underperformance in return for the small likelihood of owning the next Google .

In other words , they like to buy lottery tickets .

If you have made any of these mistakes , you should do what all smart people do : Once they have learned that the behavior is a mistake , they correct it .

LARRY SWEDROE is the author or co-author of 18 books on investing , including his latest , Enrich Your Future : The Keys to Successful Investing .

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SEPTEMBER 2024 | FINANCIAL ADVISOR MAGAZINE | 43