Needle in the Haystack

Needle in the Haystack

Pop quiz!

Question 1: Do stocks outperform one-month US Treasury Bills?

Question 2: Are individual stocks likely to outperform one-month US Treasury Bills?

You might say, Craig, those two questions are asking the same thing! And we all know that stocks are highly, highly likely to outperform cash over periods of time. Why are you wasting my time?!

Those two questions are, in reality, asking two very different things. The collective UNIVERSE of stocks ARE likely to have returns in excess of short-term treasuries (often considered the “risk-free” asset class).

BUT, any single publicly traded stock is NOT expected to outperform the risk-free rate.

I recently stumbled upon the research of Hendrick Bessembinder, a professor at Arizona State University’s W.P. Carey School of Business, that I find to be “revelatory”.

What his research found is that, of US stocks, 58% underperform T Bills. Another 38% slightly outperformed (and made up for the losses associated with the underperformers).

That left 4% of US stocks that are responsible for the entire outperformance of the collective universe of US publicly traded companies.

What about globally? Bessembinder’s research suggests that 2.4% of globally traded companies are responsible for all of the global wealth creation over a recent 30-year period

Infographic Link: do-stocks-outperform-treasury-bills-2.jpg (2925×1725)

Some might say that we ought to separate the wheat from the chaff and “just” invest in those that are going to outperform (or at least avoid the losers!). If it were possible to consistently and predictably exclude the losers, the gains to the portfolios would be enormous!

The flip side is also true. IF, in an effort to avoid the “losers” (which remind you are some 58% of the US universe of publicly traded companies), we, unfortunately, miss on the 4% of the truly exceptional companies, we could vastly underperform “the market”.

As for me (and my household!), I’ll choose the entire haystack (winners and losers)! There will be some chaff, certainly. But I’ll get the needle thrown in as well!

From an historical perspective, that outcome will likely lead to enough abundance to satisfy my goals, while at the same time, minimize my risks of missing out on wealth creation.

Systematic. Unemotional. Diversified.

Sincerely,

Craig Smith, CFP®, CFA®, CKA®

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.