What does this report say…?
According to a paper by Hendrik Bessembinder, a noted economic researcher and a professor in the Department of Finance, W.P. Carey School of Business, Arizona State University, most individual stocks lose money.
That’s a bold statement. I suppose it means one needs to pick the start and end points: when to invest and when to sell.
The paper states that “the majority of individual stock investments led to decreased rather than increased wealth in the long run. Aggregate shareholder wealth creation is concentrated in a relatively few high performing stocks.” The data on each company is relative to to a Treasury bill benchmark. The study covers the period 1926-2019, or the starting date and/or ending date of each company..
There’s a lot to digest, and my summary here is just cursory. And since it is an academic paper, there are assumptions and definitions that may not be applicable to the average investor. Dividend investing is not part of this report, so it is of only passing interest. However, there were a number of news stories about this report in the press that could not summarize the foundational assumptions underlying this research.
According to the benchmark, wealth creation is concentrated in a few large firms. His top wealth creation findings are: Apple, Microsoft, Exxon, Amazon, Alphabet, Johnson & Johnson.
There are some surprises and interesting findings in his research. His top fifty firms include some that in recent times would not be considered wealth creators (General Electric, General Motors, AT&T, and Intel, as examples), and some that no longer exist in their initial forms. For example, Exxon Mobil is included, but so is Mobil Oil (which merged with Exxon in 1999). When I looked at the list, I am reminded that many firms that are not necessarily powerhouses today, were once formidable enterprises.
He notes that wealth creation has gotten even more concentrated in fewer firms in recent years. Fortunately, he includes the complete list of top 50 companies which to his criteria increased wealth creation, and various statistics about them. The top ten firms account for more than 17% of wealth created according to his benchmark.
The entire premise–that a majority of companies reduce wealth as opposed to increase it–seems counter-intuitive. He studied all of the 26,168 firms
with publicly-traded U.S. common stocks since 1926. Certainly, many did not do well during that time. But to indicate that a majority, 57.8%, lost wealth is an eye-opening statement.
So it comes as no surprise that just as the major Dow index is price-weighted (the higher the price gain, the more it takes up of the index), so indeed according to this article, that wealth creation is being concentrated in fewer companies.
You may be interested to read this report.
You reaction? Let me know here.
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