Distribution of Lifetime Returns for Individual US Stocks, 1989-2015

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Have an individual stock idea brewing the in the back of your mind? Perhaps the recent LendingClub drama has you itching to buy a few shares of LC at under $5 a share? Above is an interesting chart that shows the distribution of total returns for individual stocks when compared to the S&P 500 index (1989-2015). It was created by Longboard Asset Management, found via Abnormal Returns.

We analyzed 14,455 active stocks between 1989 and 2015, identifying the best performing stocks on both an annualized return and total return basis. Looking at total returns of individual stocks, 1,120 stocks (7.7% of all active stocks) outperformed the S&P 500 Index by at least 500% during their lifetimes. Likewise, 976 stocks (6.8% of all active stocks) lagged the S&P 500 by at least 500%. The remaining 12,404 stocks performed above, at or below the same level as the S&P 500.

I felt that this chart shows you the psychological risks of investing in individual stocks. I’ve been dipping my toes back into individual stock investing with a very small portion of my portfolio. My general idea is to invest in some high-quality, dividend-earning stocks and thus being able to earn those dividends without paying the expense ratio of an ETF. I’d also avoid some tax-efficiency issues if I am able to hold them for very long periods as opposed to a dividend ETF that keeps changing the components of their underlying index. Here’s one of my inspirations. In other words: Buy good stocks, hold them forever.

But as the chart above shows, some of your picks will do great, and some will do horribly. Some people will tell you about their “ten-baggers” and neglect to mention the losers, while the final math will show you lagging the index. As active investors, Longboard concludes that you should focus on avoiding the underperforming assets. But I’d be wary of being so careful about avoiding losers that they miss out on the winners. (The winners often look like losers at some point… can you say Apple?)

Even if you just plan on make a few trades here and here, individual stock investing is a mental sport that takes self-discipline and a calm rationality. Very few people have the characteristics needed, even when managing their own money with no management fee drag. Charlie Munger has his own take, but also admits that only a small percentage can add value:

I think a select few – a small percentage of the investment managers – can deliver value added. But I don’t think brilliance alone is enough to do it. I think that you have to have a little of this discipline of calling your shots and loading up – if you want to maximize your chances of becoming one who provides above average real returns for clients over the long pull.

[…] I think it’s hard to provide a lot of value added to the investment management client, but it’s not impossible.

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  1. canoeguy1 says

    I would think that holding a particular stock for very long periods is an almost certain money-loser. Even dividend stocks. The tech revolution is changing every business model on an almost continual basis. How many companies from the 1950’s still exist today? A few giants made it, but most miss a turn somewhere and go bankrupt when their business is impacted by sudden innovation. Examples: Retail killed by online shopping, Coal killed by fracking, US automakers hit by foreign competition, Nokia handsets killed by the Smartphone.
    The continual adjustments that funds make are necessary because of these sudden changes. Unless you understand the industry well enough to see such a sudden disruption coming before your stock tanks, it’s probably better to leave the stock-picking to people who are experts in the sector, even if it costs a few tenths of a percentage point.

  2. interesting data, it would be cool to see a broader range given this is still a short time-frame in time… Personally, I just think that total market ETF is the easiest solution, get a bit of the bad apples but over the long run, you end up ahead…

  3. I think that a static portfolio of blue chip stocks could do better than a portfolio with high turnover. If you hold directly, and reinvest those dividends, you may do pretty well, as you are avoiding taxes, commissions etc. Just check the performance of the original S&P 500 companies from 1957 ( I linked under my profile name to an article where I discuss results). And you have already seen how the Corporate Leaders Trust has done so well, despite the high expenses.

    The downside of the study from Longmont is that it just looks at a group of all companies, without looking at quality factors. I think that blue chip companies have a “quality” factor. While it is difficult to predict the future, I think that a lot of established companies would do better as a group than say newer and untested companies – IPOs being one such group. Some IPOs could turn out to be excellent winners – like Home Depot. Others like Pets.com could turn out to be collosal failures.

    Plus, I think some of the ways they present the data is a little “confusing” – they switch from talking about relative performance to total performance. In addition, without knowing the timeframe under which companies generated those gains, we cannot make the judgment whether a 100% gain is good or bad. For example, Baxalta is up more than 30% since the split from Baxter in the middle of 2015, and it will likely be acquired soon. This 30% gain will register terribly on Longboard’s research, when in reality a 30% return since 2015 has beaten the S&P 500 out of the ballpark.

  4. Tom Madison says

    My preference of owning Berkshire over a index is based on it not paying a dividend. Due to the fact I don’t need the income currently, and I live in CA, one way to control your taxes is just let the company reinvest their earnings.

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