A growing number of studies show that a tiny fraction of stocks account for virtually all the value created in the equity market. Hendrik Bessembinder, from Arizona State University, has been at the forefront in this area of research. We asked him about his findings and the implications for investors.
“The two key findings that surprised me, along with a number of others, are, first, that most stocks do not outperform Treasury Bills in the long run, and, second, that the net long-term creation of shareholder wealth in the stock markets is concentrated in very few stocks.”
Thousands of technology stocks have delivered disappointing returns in the long run as well, so the implication is not as simple as just ‘buy technology stocks
“While I have not investigated this issue systematically, it is clear that a small group of technology-related stocks, such as Apple, Amazon, Alphabet and Facebook, are responsible for a substantial portion of the stock market’s recent wealth creation, particularly in recent years. In a new study, I provide an update on this.1 On the other hand, thousands of technology stocks have delivered disappointing returns in the long run as well, so the implication is not as simple as just ‘buy technology stocks’.”
“I recently released a set of four reports on this subject.2 Among other findings I document that top-performing firms most often have rapid organic, that is not based on acquisitions, asset growth, and in particular have strong cash accumulation. Top-performing firms are more also more profitable on average, despite higher R&D spending, and have profit growth rates that exceed their rapid asset growth.”
“Top performing firms in terms of accumulated rates of return tend to be younger and have more volatile returns as compared to more ordinary firms, while top performing firms in terms of dollar shareholder wealth creation tend to be older and do not have particularly volatile returns. Perhaps surprisingly, given that the distribution of long run market outcomes is highly positively skewed, which gives rise to the concentrated wealth creation outcome top performing firms do not tend to have highly skewed short run returns.”
“The economy is dynamic, perhaps to a greater extent than many realize. That said, stocks disappear from the public market – not just because of poor investment results associated with being on the receiving end of economies’ ‘creative destruction’, but also because companies are frequently acquired, which tends to be a positive event for investors in the acquired firm.”
“As you note, my main research results are attributable to the fact that there is substantial positive skewness in the distribution of long-horizon stock returns. I show, through simulations, that long-run skewness depends on short-run return volatility. Adam Farago and Erik Hjalmarsson3 show more rigorously that the main determinant of long-run return skewness is short-run return volatility. So, I believe the answer is that companies that have completed IPOs in recent decades tend to be riskier firms. Of course, that alone does not mean they were bad investments.”
“The short answer is that I do not know. But it may be the case that the internet-based economy has allowed for more ‘winner-take-all’ outcomes in certain industries.”
“I see no reason to think that the future will be markedly different from the past. Stated differently, I am confident that a relatively small proportion of stocks will be responsible for a large share of market performance over the next decade. Which stocks that will be is, of course, a much harder question to answer.”
There are more people who think or claim to be as talented as Warren Buffett, than there are people who are actually as talented as Warren Buffett
“The implications for investors depend on the efficiency of the market and on the comparative advantage of identifying in advance which stocks will turn out to be long-run winners (or losers). Investors who do not have a comparative advantage along these lines, and who do not have a strong preference for skewness, should stick to low-cost, highly diversified, index funds. The reasons as to why have already been covered in all the textbooks. In addition, a poorly diversified portfolio has a less than 50% chance of beating a diversified portfolio.”
“If the market is not fully efficient – and I think this is the case – investors with the right comparative advantage should be working hard to identify the ‘next Amazon’. The big question is: who has the right comparative advantage? There are more people who think or claim to be as talented as Warren Buffett, than there are people who are actually as talented as Warren Buffett.”
This article is an excerpt of a longer interview published in our new ‘Big Book of Trends and Thematic investing’.
1 Bessembinder, H., 2020. “Wealth Creation in the U.S. Public Stock Markets 1926 to 2019”, working paper.
2 Bessembinder, H., 2020. “Extreme Stock Market Performers, Part I: Expect Some Drawdowns”, working paper. Bessembinder, H., 2020. “Extreme Stock Market Performers, Part II: Do Technology Stocks Dominate?”, working paper. Bessembinder, H., 2020. “Extreme Stock Market Performers, Part III: What are their Observable Characteristics?”, working paper. Bessembinder, H., 2020. “Extreme Stock Market Performers, Part IV: Can Observable Characteristics Forecast Outcomes?”, working paper.
3 Farago, A. and Hjalmarsson, E. , 2019. “Compound Returns”, Proceedings of Paris December 2019 Finance Meeting EUROFIDAI – ESSEC.
Please read this important information before proceeding further. It contains legal and regulatory notices relevant to the information contained on this website.
The information contained in the Website is NOT FOR RETAIL CLIENTS - The information contained in the Website is solely intended for professional investors, defined as investors which (1) qualify as professional clients within the meaning of the Markets in Financial Instruments Directive (MiFID), (2) have requested to be treated as professional clients within the meaning of the MiFID or (3) are authorized to receive such information under any other applicable laws. The value of the investments may fluctuate. Past performance is no guarantee of future results. Investors may not get back the amount originally invested. Neither Robeco Institutional Asset Management B.V. nor any of its affiliates guarantees the performance or the future returns of any investments. If the currency in which the past performance is displayed differs from the currency of the country in which you reside, then you should be aware that due to exchange rate fluctuations the performance shown may increase or decrease if converted into your local currency.
In the UK, Robeco Institutional Asset Management B.V. (“ROBECO”) only markets its funds to institutional clients and professional investors. Private investors seeking information about ROBECO should visit our corporate website www.robeco.com or contact their financial adviser. ROBECO will not be liable for any damages or losses suffered by private investors accessing these areas.
In the UK, ROBECO Funds has marketing approval for the funds listed on this website, all of which are UCITS funds. ROBECO is authorized by the AFM and subject to limited regulation by the Financial Conduct Authority. Details about the extent of our regulation by the Financial Conduct Authority are available from us on request.
Many of the protections provided by the United Kingdom regulatory framework may not apply to investments in ROBECO Funds, including access to the Financial Services Compensation Scheme and the Financial Ombudsman Service. No representation, warranty or undertaking is given as to the accuracy or completeness of the information on this website.
If you are not an institutional client or professional investor you should therefore not proceed. By proceeding please note that we will be treating you as a professional client for regulatory purposes and you agree to be bound by our terms and conditions.
If you do not accept these terms and conditions, as well as the terms of use of the website, please do not continue to use or access any pages on this website.