FYI: Fifty eight percent of CRSP common stocks have lifetime holding period returns less than those on one-month Treasuries. The modal lifetime return is -100%. When stated in terms of lifetime dollar wealth creation, the entire net gain in the U.S. stock market since 1926 is attributable to the best-performing four percent of listed stocks, as the other ninety six percent collectively matched one-month Treasury bills. These results highlight the important role of positive skewness in the cross-sectional distribution of stock returns. The skewness arises both because monthly returns are positively skewed and because compounding returns induces skewness. The results help to explain why active strategies, which tend to be poorly diversified, most often underperform.
Regards,
Ted
https://alphaarchitect.com/2017/10/06/reconciling-individual-stock-returns-and-factor-portfolio-returns/
Comments
Thanks Ted for this informative reference. Great stuff!
Hindsight data makes all of us seem smarter. It's much easier to explain with after-the-fact-data accessible then when making a market projection and investment decision.
I was not aware of the fact that over reasonably long hauls, the percentage of winning stocks relative to the entire universe is so small, in fact a tiny and elite group.
That goes a long way to explaining why so many active mutual fund portfolio managers are losers relative to Index portfolios. Given that fund managers abhor concentration, even if a smart or lucky manager does identify the upcoming winners, his diversified portfolio will likely include many underperformng stocks which will compromise his overall portfolio's total return.
Concentrated portfolios would be one solution, but good luck on being so insightful to select the winning few from the losing many. Maybe Indexing is not so bad a long term strategy after all.
Best Regards