Sunday, July 21, 2019

Stocks Don't Do So Hot - Most equities don't beat one-month Treasury bills

Stocks are risky investments. Let's be very clear, stocks are risky with positive skew. Of course, everyone knows that but some data published about two years really drove that home. (See my earlier post "Most stocks are losers - Median and skew tell an important story" about the paper "Do stocks Outperform Treasury Bills" by Hendrik Bessembinder)That path-breaking work has now been updated for more time and across international stocks, see Do Global Stocks Outperform US Treasury Bills?

This meaningful research again comes from Henrik Bessembinder who found in his original paper that over half the stocks in the US never make more than the risk-free return. Most of the wealth from equities comes from a very small percentage of firms. This research has now been updated and includes 62,000 domestic and international stocks. The results are about the same, but even worse for international stocks.

The long-run performance is highly skewed positive and shows that most of the global wealth from equities comes from a limited set of names. Investors are not compensated for the risk that they take with buy and hold investing with individual equities. Most stocks around the world cannot beat the risk-free rate. An investor can still make money by holding an index which will contain the few winners, but long-run stock-picking by this simple measure is a losers game 

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