By Randall W. Forsyth
Just a few stocks drive all the returns of the equity market while the vast majority matter little. Indeed, most of them just detract from gains produced by the leaders.
This isn’t about the Magnificent Seven behemoth tech stocks, which have accounted for the lion’s share of equity returns over the past two years. A study of U.S. stocks’ returns over nearly a century finds that the median stock actually lost money since 1926 — even while a dollar invested across all stocks on average grew to $229.40 by the end of 2023.
Of course, the concentration of outsize returns in just a few stocks is nothing new and, in fact, appears to be the norm over the modern history of equity markets that began in the first Roaring ’20s of the last century.
All this comes from recent research by Arizona State University finance professor Hendrik Bessembinder. Examining results from 29,078 common stocks in the database of the Center for Research in Security Prices, or CRSP, going back to Dec. 31, 1925, he found that most stocks lost money and that a few big winners generated huge returns over time. His 2020 research noted that 96% of stocks merely matched the return of one-month Treasury bills from 1926 through 2019. From that, one might conclude that the risk and expense of buying equities isn’t worth the trouble. After all, only 86 stocks produced $16 trillion in wealth over that span.
In fact, the professor’s recent paper does seem to suggest that stock investing is futile — though it’s a little more complicated than that. Looking at the CRSP database through the end of 2023, he found most stocks, 51.6% to be exact, lost money, with a median negative return of 7.41% over the 98-year span.
But the average, or mean, return across all stocks for that period was 22,840%. In other words, $1 invested grew into $229.40 owing to the outsize contribution of a few winners. Over that same span, inflation amounted to 1,614%, or 2.94% per annum.
That 98 years included the crash of 1929, from which the Dow Jones Industrial Average took a quarter-century to recover from. It also covered the fallow stretch from the peak of the 1960s’ go-go years, when the Dow first hit the then-magic 1,000 level, and the 1973 peak of the Nifty Fifty, through the subsequent so-called Death of Equities until the liftoff of the great bull market of the 1980s, when blue chips would finally regain the 1,000 mark for good.
While the majority of stocks lost money from 1926 through 2023, 17 stocks returned over five million percent, turning a dollar invested in them into $50,000. The biggest return came from Altria Group, formerly Philip Morris, which turned a buck into $2.65 million during that time. Lottery ads tout “a dollar and a dream” to lure punters with dreams of instant fortunes. But selling butts over time did better for investors (if not consumers of tobacco).
Runner-up was Vulcan Materials, which turned an investment of $1 into $393,492, according to Bessembinder’s analysis. Altria returned 16.29% per annum over those 98 years, while Vulcan, which sells crushed stones, sand, and gravel for construction, returned 14.05% a year. Those returns demonstrate, he says, that consistent but relatively modest returns from seemingly staid businesses can generate fortunes over decades.
It shouldn’t be a surprise that the headiest annual returns came from some of the Magnificent Seven megacap tech stocks. Among companies with at least 20 years of return data, Nvidia, natch, tops the standings with a 33.38% annual compound return from Jan. 22, 1999, through 2023, during which $1 would have grown to $1,316 over the study’s span. (That doesn’t include Nvidia’s spectacular 171.2% return notched in 2024.)
Other world-beaters were No. 3 Netflix, which returned 32.06% per annum from May 23, 2002 through 2023, growing $1 into $406.94. That was followed by Mag 7 member Amazon.com, which returned 31.87% from May 15, 1997, through 2023, growing $1 to $1,551.73. The greatest total increase in a $1 stake among companies with a 20-year-plus track record was achieved by Home Depot, which grew a buck to $16,627.40 from its initial public offering on Sept. 22, 1981, through 2023, a product of 25.87% annual returns compounded over more than 42 years.
It would seem that these data demonstrate the wisdom of humorist Will Rogers’ investment advice: “Don’t gamble. Take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don’t go up, don’t buy it.”
While Bessembinder found that most stocks fell into the latter category, the overall equity market returns are strongly positive over time. Stocks that generated cumulative returns of more than five million percent over 98 years did so with relatively modest annualized returns averaging 13.5%,
By contrast, companies with the highest absolute annual returns tend to fizzle quickly. Bessembinder cites Ascend Communications, which, during the dot-com daffiness, posted an annual return of 119.64% between May 13, 1994 and June 24, 1999, until it was taken over by Lucent Technologies.
The lesson from his study would seem to be to stay invested in the market and let the winners run, which results in their having an outsize weight in an unmanaged index. Rebalancing to reduce the winners’ outsize presence has been famously likened by the legendary Fidelity Magellan manager Peter Lynch to “pulling out the flowers and watering the weeds.”
That also means accepting extended periods of lackluster returns, such as periods following the 1929 and 1973 peaks. Recently, Goldman Sachs forecasted paltry S&P 500 annual returns of 3% for the next 10 years. No less a long-term bull than Warren Buffett seemed to agree, building Berkshire Hathaway’s cash hoard to over $300 billion.
Still, history shows that sticking with stocks works over the very long term.
Write to Randall W. Forsyth at randall.forsyth@barrons.com