Most stocks lose money. A tiny minority generates all the gains. And the gap is widening. So says Prof Hendrik Bessembinder, whose work on stock returns has become something of a benchmark.
In a new paper, One Hundred Years in the US Stock Markets, Bessembinder notes that while markets have created a formidable $91 trillion in shareholder wealth, gains are more concentrated than ever. Fewer than 4 per cent of companies account for all of it.
In 2016, Bessembinder calculated that just 89 companies accounted for half of total stock market gains. That sounds alarmingly small, but today’s figures are even more sobering, with only 46 companies (out of a total of nearly 30,000) now accounting for half of that total.
The number of companies responsible for a quarter of all market wealth has dropped from 20 to just eight. It now takes only two companies (Apple and Nvidia) to account for a tenth of the total, down from five in 2016.
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Beating the market is pretty rare, with just over a quarter of individual stocks managing to outperform. Worse, most stocks do not merely lag – they fail, with nearly 60 per cent underperforming one-month treasury bills over their lifetimes.
Put bluntly, losing money is perfectly normal, with the median stock return being a loss of 6.9 per cent. That is, if you picked a single stock at random and held it for its lifetime, you were more likely to lose money than gain it.
Bessembinder’s findings have always been stark for stock-pickers, but they are starker still today. The market is becoming even more winner-takes-all.
Stock market investing works not because most companies succeed, but because a small minority succeed spectacularly. For most investors, the message is obvious: short of foresight worthy of Nostradamus, diversification is the only way to share in the market’s winners.
