Indiana Trust Wealth Management
Investment Advisory Services

by Clayton T. Bill, CFA
Vice President, Director of Investment Advisory Services

  • The US equity market, represented by the S&P 500 index, slipped 1% for the week ending September 8.
  • Recent research shows how difficult it is to pick stocks to beat the market consistently over the long-term. This evidence has implications for active and passive equity management.

Picking stocks that beat the market over time can lead to fantastic returns. Unfortunately, picking those winners is exceptionally difficult as they are few and far between.

Hendrik Bessembinder, a professor at Arizona State University, is well-known in academic circles for his research on individual stock performance. He has recently updated his previous work, and the abstract from his new paper is as follows:

“We study long-run shareholder outcomes for over 64,000 global common stocks during the January 1990 to December 2020 period. We document that the majority, 55.2% of U.S. stocks and 57.4% of non-U.S. stocks, underperform one-month U.S. Treasury bills in terms of compound returns over the full sample. Focusing on aggregate shareholder outcomes, we find that the top-performing 2.4% of firms account for all of the $US 75.7 trillion in net global stock market wealth creation from 1990 to December 2020. Outside the US, 1.4% of firms account for the $US 30.7 trillion in net wealth creation.”[1]

Mr. Bessembinder is careful to note that broad returns to stock markets handily outperform returns on Treasury bonds over time because of the performance of those top stocks.

The upshot: most stocks are losers that do not even outperform a money market fund, and only a few percent of firms drive stock market wealth.

At the same time, this highlights the allure of active equity management: while hard to do in practice, picking the right stocks can lead to fabulous wealth creation. Why is it so hard to pick stock market winners and avoid losers? The stock market and capitalism are very complex systems with so many impactful factors that it becomes nearly impossible to predict a firm’s future performance.

To boot, there are innumerable biases that infect asset managers – overconfidence, recency, confirmation, anchoring, and so on – that lead to poor decision making. These biases can lead to far too much turnover in active manager portfolios. Research from Vanguard has shown that the road to active management outperformance is long and bumpy, and some patience – and faith? – is required.

The body of evidence on individual stock performance has deep implications for active equity management. Given the biases of any one manager and the importance of market-consistent returns, the use of multiple active managers begins to make sense. That helps reduce manager risk.

The research also provides strong evidence for including passive management in portfolios: mutual funds and ETFs which track indexes such as the S&P 500. Passive management removes tracking error to the market and ensures that an investor simultaneously owns every winner along with every loser. Because it is so hard to know in advance which stocks will be the drivers of returns, it is vital that portfolios include virtually all stocks in the market. Market-consistent returns are critical.

Mr. Bessembinder’s research is the “bottom-up” rationale for a well-diversified, market-oriented equity portfolio. The “top-down” rationale for investing in a market-consistent manner is that, over time, total corporate profits go up. Historically, when it comes to total corporate profits, there has been no “loser” to avoid or “winner” to pick.

[1] Bessembinder, Hendrik (Hank) and Chen, Te-Feng and Choi, Goeun and Wei, Kuo-Chiang (John), Long-Term Shareholder Returns: Evidence from 64,000 Global Stocks (March 6, 2023). Financial Analysts Journal, Forthcoming, Available at SSRN:


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