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strong evidenceDiversificationInvesting

Most individual stocks lose money; a few pay for everything

The claim

The majority of individual stocks underperform Treasury bills over their lifetimes, and aggregate stock market wealth creation traces to a small minority of firms.

Why we rate it strong

Computed directly from the full CRSP universe over nine decades, and replicated on global data.

Bessembinder examined every US common stock from 1926 onward. The MedianThe middle value, with half of the sample above and half below. It differs sharply from the average whenever a few extreme results pull the average away, which is exactly what stock returns do. stock's lifetime return underperformed one-month Treasury billShort-dated US government debt, the conventional stand-in for a risk-free asset. When a study says a stock underperformed T-bills, it means holding it was worse than holding the safest thing available.. Slightly over four percent of listed companies accounted for the entire net wealth creation of the US stock market above T-bills; the other ninety-six percent, collectively, matched cash.

This is not a paradox. Stock returns are extremely SkewAn asymmetric spread of outcomes. Stock returns are right-skewed: a loss stops at 100% while a gain has no ceiling, so a handful of enormous winners drag the average far above the typical result.: losses are capped at 100% while gains are unbounded, so a small number of enormous winners drag the mean far above the median. The market goes up because of a handful of companies, and there is no reliable way to know in advance which handful.

The practical implication is sharper than the usual 'don't put all your eggs in one basket'. A concentrated portfolio does not merely have higher VarianceThe squared spread of returns around their mean, and the raw material of volatility. Higher variance around the same expected return is worse for anyone who must sell on a fixed date. around the same Expected returnThe probability-weighted average of what could happen — not a prediction of what will. A strategy can have the higher expected return and still be the wrong choice for someone who cannot survive its bad tail. — its most likely outcome is meaningfully worse than the market, because it will probably miss the few names that mattered. Owning the whole market guarantees you own the winners. It is the only strategy that does.

Where this breaks down

  • Skewness cuts both ways for index investors: a market-cap-weighted index gets its return from the same few winners, and is therefore more concentrated than it looks.
  • The result is about individual stock selection. It does not imply anything about diversifying across asset classes, which rests on a different argument about correlation.
  • Bessembinder's finding is computed over full company lifetimes. Shorter holding periods change the distribution.

Terms used on this page

The same definitions the underlined words open, written out so nothing on this page depends on a click.

Treasury bill
Short-dated US government debt, the conventional stand-in for a risk-free asset. When a study says a stock underperformed T-bills, it means holding it was worse than holding the safest thing available.
Median
The middle value, with half of the sample above and half below. It differs sharply from the average whenever a few extreme results pull the average away, which is exactly what stock returns do.
Skew
An asymmetric spread of outcomes. Stock returns are right-skewed: a loss stops at 100% while a gain has no ceiling, so a handful of enormous winners drag the average far above the typical result.
Variance
The squared spread of returns around their mean, and the raw material of volatility. Higher variance around the same expected return is worse for anyone who must sell on a fixed date.
Expected return
The probability-weighted average of what could happen — not a prediction of what will. A strategy can have the higher expected return and still be the wrong choice for someone who cannot survive its bad tail.

Sources

Follow these rather than taking our word for the summary.

  • Hendrik Bessembinder (2018). Do Stocks Outperform Treasury Bills?

    Journal of Financial Economics, 129(3), 440-457

    Finding: The median US stock underperformed one-month T-bills over its life; 4% of firms account for all net market wealth creation.

  • Elroy Dimson, Paul Marsh and Mike Staunton (2024). Global Investment Returns Yearbook

    UBS / London Business School, annual since 2000

    Finding: Long-run equity returns vary widely across 20+ national markets; the US was among the strongest, making US-only data an optimistic base case.

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