4% of Stocks Created Wealth
By James Parkyn - PWL Capital - Montreal
How to ensure you own tomorrow’s winners
It’s well known that owning stocks can generate great returns over the long run. Less known is the fact that almost all of that wealth creation typically comes from a tiny number of stocks.
New research shows that $1 invested in the U.S. stock market in 1926 would have grown to an impressive $229.40 by 2023. That’s a cumulative compound return of 22,840%.
Even more remarkable, however, is that just 4% of stocks accounted for all stock market wealth creation above a risk-free investment in Treasury bills. In fact, a majority of stocks—51.6% to be exact—actually had negative compound returns from 1926 to 2023. In other words, slightly more than half of stocks lost money over their life.
The median stock lost 7.41%
These are some of the fascinating conclusions of Arizona State University economist Hendrik Bessembinder.
In a new paper, Bessembinder analyzed the retrns of 29,078 publicly listed common stocks from 1926 to 2023. His findings give powerful support for investing strategies that focus on passively owning a broadly diversified portfolio of stocks with a long-term horizon—the approach we use at PWL.
Here are some of Bessembinder’s other conclusions:
Companies remained publicly listed for only 11.6 years on average.
Just 31 stocks remained publicly listed in the database for the full 98 years.
The median cumulative compound return of all the stocks was -7.41% per year.
Top performer gained 266 million percent
How is it possible for the median return to be negative when the mean compound return was 22,840%? This is because of the magic of averaging. The mean average return is skewed heavily upward by massive gains of a small number of companies. These are the companies it’s essential to own for our investments to make money.
As Bessembinder put it in a recent interview, “Long-run wealth enhancement in the public stock market is concentrated in relatively few stocks.”
Among the best 30 performers: Emerson Electric Co., in 30th place, with a cumulative return of 2.4 million percent, and top dog Altria Group (formerly Philip Morris), with an otherworldly 266 million percent gain.
Those aren’t typos. Stated differently, $1 invested in Emerson Electric would have become $24,098, while a dollar invested in Altria/Philip Morris stock would have grown to $2.66 million.
Compounding led to massive profits
These astonishing profits, incidentally, show the value of patiently accumulating compounded returns over the long run.
Interestingly, Emerson Electric made its gains with what Bessembinder calls only a “moderately high” annualized compound return of 13.57%. The key was 79 years of compounding at this rate.
Altria, for its part, had only a somewhat higher annualized compound return of 16.29%. But when compounded over 98 years, this yielded an extraordinary gain.
Five firms accounted for 11.9% of gains
Bessembinder’s findings confirm his earlier landmark research in which he found that just five of 26,168 publicly listed firms accounted for 11.9% of net U.S. shareholder wealth creation of $47.38 trillion from 1926 to 2019.
This concentration is increasing. In 2016-2019, just five firms accounted for an even bigger slice—22.1%—of shareholder wealth creation.
“This tendency for wealth creation to be concentrated in a few stocks has grown even stronger in recent years,” Bessembinder recently said.
How to own the next winners
What does all this mean? A tiny number of stocks is responsible for almost all wealth gain in the stock market. If you didn’t own those stocks, you would have lost money. How do you know which stocks to buy? You don’t. No one can know in advance which companies will be the best performers.
The answer is not to gamble your savings and legacy on trying to find the hot new trend of the day, but to be sure you own the next Altria, Emerson or Google by owning every stock. This can be accomplished through broad index funds that hold all the companies in various market indexes, such as the S&P 500 Index or S&P/TSX Composite Index.
As Bessembinder put it, “The only way to be certain of owning the stocks that turn out to be the future big gainers is to own all the stocks” in a broad index fund.
At PWL, we couldn’t agree more. This is the approach that is at the core of our data-driven strategy focused on the long term.
Fads and companies come and go, but a disciplined approach of owning the entire market ensures you’ll benefit from the winning companies of the next 98 years.
Read more commentary and insights on personal finance and investing in our past blog posts, eBooks and podcast on the website of PWL Capital’s Parkyn-Doyon La Rochelle team and on our Capital Topics website.