A new academic paper was recently published with a confusing yet provocative title: Do Stocks Outperform Treasury Bills?. Of course they do… right? An excerpt from the abstract:
Most common stocks do not outperform Treasury Bills. Fifty eight percent of common stocks have holding period returns less than those on one-month Treasuries over their full lifetimes on CRSP. […]
But everyone knows stocks return more than cash. How does this work? Taken altogether, stocks outperform cash. But if you picked any individual company, your results can vary from total bankruptcy to extraordinary wealth. The paper found that if you pick an individual company and held it over its lifetime, it would be more likely than not to underperform a 4-week T-Bill (classified as a cash equivalent). You can use the T-Bill as an approximate tracker of inflation.
Wes Gray points out at Alpha Architect that this idea has been explored before. Here’s a chart of the distribution of total lifetime returns for individual U.S. stocks. The research is done by Blackstar Funds, via Mebane Faber at Ivy Portfolio.
The U-shaped distribution shows that there are a lot of big losers and a lot of big winners. Actually some are huge winners. In the end, a small minority of stocks have been responsible for virtually all the market’s gains.
Here we see that out of the 26,000 stocks studied, these 10 stocks below have accounted for 1/6th of all the wealth ever created in the US stock market.
I should reiterate that these are lifetime returns, from when they appeared in the CRSP database until now or whenever they liquidated. Unless you bought these stocks essentially at IPO (or 1926 when the database starts), you probably didn’t get these returns. If you go out and buy a well-established company today, your distribution of returns will likely look different. You’d be less likely to go bankrupt but also less likely to make a 20,000% return.
If you take a step back, as Larry Swedroe points out, this means it is technically quite easy to outperform an index fund. You simply either (1) avoid investing in a few big losers or (2) invest extra in a few big winners. That’s it! Gotta be easy to filter out a few duds, right? Yet, the lack of outperformance on average by professional managers continues, and the managers that outperform can’t be predicted ahead of time. So you can keep looking for the needles in the haystack, or you can buy the whole haystack.