All the gains come from 4% of stocks

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RussellWilson
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Joined: Fri Oct 18, 2019 10:08 pm

All the gains come from 4% of stocks

Post by RussellWilson »

Most have presumably heard of the research paper concluding that 4% of stocks have accounted for all the market gain in excess of treasury bills.

https://www.google.com/amp/s/www.kiplin ... html%3famp

What I'm wondering is how market cap relates to this. I get that there are thousands of stocks and half will probably disappear, so that accounts for a large chunk of that 96%. It seems counterintuitive though that a top 10 market cap stock would be expected to underperform t-bills. If the threshold was beating the market average, that would make more sense, but t-bills is a low bar. Is this a relic of some past time when t-bills returned 6% and stocks returned 7?
yog
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Re: All the gains come from 4% of stocks

Post by yog »

The study reflects accumulated total returns over the study's 1926-2017 horizon. Present market cap is a fleeting expectation for returns in the future, and usually the captains of industry change every 10 years or so.

This infographic of the study's Top 20 wealth creators may help highlight this, as some of the companies like IBM, GE, & DuPont are now outside the present top 100 by market cap:
https://wpcarey.asu.edu/sites/default/f ... -bills.pdf
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Topic Author
RussellWilson
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Re: All the gains come from 4% of stocks

Post by RussellWilson »

That makes sense. I guess I need to read the paper to be sure I understand methodology. One thing I notice is it says it evaluates based on a stock's investable lifetime. Stocks at least historically have started as small or micro caps. If I'd read that only 4% of small/micros beat 1 month treasuries, I'd believe that easily. I wonder how different the numbers are if instead you look at all companies from a series of random dates, so you get companies of all sizes. I'd want to know what portion of SP 500 companies beat 1 month treasuries, what portion of top 10 etc.
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vineviz
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Re: All the gains come from 4% of stocks

Post by vineviz »

Keep in mind that 4% of stocks in this context is nearly 1,100 stocks, which covers the vast majority (by weight) of the stocks the typical investor would be invested in.

If you systematically bought ONLY the largest 20% of stocks each month from 1926 to now you'd have outperformed Treasury bills by nearly 9%/year. On average, that's just the 250 to 500 largest stocks. As others have pointed out, most really really really small companies (like pink sheet stocks and penny stocks) end up failing. Even total market stock market funds end up screening those out.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
Gaston
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Re: All the gains come from 4% of stocks

Post by Gaston »

Articles appear every few years that cite similar findings. Some take a narrower focus, examining the S&P 500 rather than the entire US equity market. But the findings are the same: that, in any given year, a handful of stocks (10% or fewer) represent the majority of the gain or loss of the entire S&P 500.

The above is an argument for investing in a broadly diversified equity fund, and to shun market timing: if you are not in the right handful of stocks at the right time, you will underperform. Since no one can consistently predict which stocks will outperform, this also is one reason that active managers tend to underperform the board market indices over longer periods of time.
“My opinions are just that - opinions.”
yog
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Re: All the gains come from 4% of stocks

Post by yog »

This study is definitely worth reading, and it lays out all the methodology. It was last updated in 2019. Here's the main landing page for the study with all the relevant links:
https://wpcarey.asu.edu/department-fina ... sury-bills

Since 1926, only 86 stocks produced half the market's shareholder wealth creation.
Broad-based low-cost indexes are the best way for the majority to participate in the market.

I am positively skewed, but it comes with risks most shouldn't take.
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Cheez-It Guy
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Re: All the gains come from 4% of stocks

Post by Cheez-It Guy »

I'm planning to just invest in the 4%.

It's a can't miss!

Wish me luck!
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nedsaid
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Re: All the gains come from 4% of stocks

Post by nedsaid »

vineviz wrote: Sun Jan 23, 2022 8:49 am Keep in mind that 4% of stocks in this context is nearly 1,100 stocks, which covers the vast majority (by weight) of the stocks the typical investor would be invested in.

If you systematically bought ONLY the largest 20% of stocks each month from 1926 to now you'd have outperformed Treasury bills by nearly 9%/year. On average, that's just the 250 to 500 largest stocks. As others have pointed out, most really really really small companies (like pink sheet stocks and penny stocks) end up failing. Even total market stock market funds end up screening those out.
I always thought the statements that 4% of the stocks created all of the stock market gains was a bunch of baloney. I have owned individual stocks for years and years, I can tell you that way, way, way more than 4% of my stocks had gains. I don't buy the pink sheet stocks, the speculative mining companies on the Vancouver Stock Exchange, or the NASDAQ Bulletin Board. If I had to guess, there must be 10,000 stocks listed somewhere in the United States but probably only about 3,500 are investable.

My eyes just roll when I see this "4%" comment repeated here over and over again as if it is Holy Writ. Good to see a knowledgeable poster joining me in calling baloney on this.
A fool and his money are good for business.
randomguy
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Re: All the gains come from 4% of stocks

Post by randomguy »

nedsaid wrote: Sun Jan 23, 2022 10:13 am
vineviz wrote: Sun Jan 23, 2022 8:49 am Keep in mind that 4% of stocks in this context is nearly 1,100 stocks, which covers the vast majority (by weight) of the stocks the typical investor would be invested in.

If you systematically bought ONLY the largest 20% of stocks each month from 1926 to now you'd have outperformed Treasury bills by nearly 9%/year. On average, that's just the 250 to 500 largest stocks. As others have pointed out, most really really really small companies (like pink sheet stocks and penny stocks) end up failing. Even total market stock market funds end up screening those out.
I always thought the statements that 4% of the stocks created all of the stock market gains was a bunch of baloney. I have owned individual stocks for years and years, I can tell you that way, way, way more than 4% of my stocks had gains. I don't buy the pink sheet stocks, the speculative mining companies on the Vancouver Stock Exchange, or the NASDAQ Bulletin Board. If I had to guess, there must be 10,000 stocks listed somewhere in the United States but probably only about 3,500 are investable.

My eyes just roll when I see this "4%" comment repeated here over and over again as if it is Holy Writ. Good to see a knowledgeable poster joining me in calling baloney on this.
According to the article 44% of large caps beat the large cap index over 10 year periods. We might not be talking about pink sheet stocks here but we are talking about a lot of pets.com type companies.

The other thing that bothers me is I am not sure how they are tracking the value of companies. For example if I bought 100 shares of GM in 1910 (or whenever they went public the first time), what is it's value today? 0 because the stock was delisted in 2009? How are you tracking the value of EDS, Hughes, Delphi, and the rest of the spin offs? It feels like we might just be seeing the natural course where companies are created, created value for a while, and then fade away....
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