Most Stocks Stink

Even if the vast majority of stocks will be poor investments, most equity portfolios will do just fine

John Rekenthaler 18 April, 2017 | 15:37
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“Do Stocks Outperform Treasury Bills?,” asks Arizona State University’s Hendrik Bessembinder. Well played, professor. The reply to the headline’s question surely can’t be yes, because that would be no story at all; everybody knows that stocks beat Treasuries. But how could it be no? Everybody knows that stocks beat Treasuries.

So much for what we know. Bessembinder’s verdict: “Most common stocks do not outperform Treasury bills.” Well now. Even those who make a living by studying stock-market returns were taken aback by that comment, and by the data that followed. Wes Gray, who holds a University of Chicago doctorate in finance, regards this result as “exciting, new, and intriguing.” With that assessment, I fully agree.

To be sure, the direction of the paper’s finding is not new. Because of the effects of compounding, the median return on stocks that are held for a long time is less than the average return. This point is simple. The most money that a stock can lose is 100% of the initial investment. In contrast, the most that it can gain is infinite. True, its actual performance will be finite, but over time the cumulative growth can be enormous.

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John Rekenthaler  is vice president of research for Morningstar.

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