Do most stocks outperform Treasury bills?
Core argument: Only 4% of listed firms accounted for all net stock market gains from 1926 to 2016, while most listed firms delivered lifetime buy-and-hold returns below those of one-month Treasury bills.
The analysis reveals a striking concentration of wealth creation in the stock market, with just five firms—Exxon Mobil, Apple, Microsoft, General Electric, and IBM—accounting for 10% of total wealth creation from 1926 to 2016. Furthermore, only 4% of firms were responsible for all net stock market gains during this period, highlighting a significant skewness in returns. This suggests that while stocks can outperform Treasury bills, the majority of listed firms have lifetime buy-and-hold returns that are less than one-month Treasuries. The data underscores the importance of selecting the right stocks for substantial returns, as a small fraction of firms drive the majority of market gains.
Steve Comment: See table“Panel A of Table 2A reports summary statistics for the pooled distribution of 3,575,216 monthly common stock returns contained in theCRSP database from July 1926 to December 2016, as well as matched Treasury bill returns. The data confirm that the mean excess return is positive, as the average monthly return is 1.13%, compared toan average one-month Treasury bill return during the same month of 0.37%..”
Ed Comment::Speaking loosely 1:25 account for all the gain (since the one-month treasury is effectively inflation please zero return. What is the 1-month treasury return bench march he is using over the period?) 1:300 account for all the excess profits. And these are the companies that made it public!!! For every one of those, there are probably many that failed long before.
"....Themajority of common stocks that have appeared in the Center for Research in Security Prices (CRSP) database since 1926 have lifetime buy-and-hold returns less than one-month Treasuries. When stated in terms of lifetime dollar wealth creation, the best-performing 4% of listed companies explain the net gain for the entire US stock market since 1926,as other stocks collectively matched Treasury bills.....Of all monthly common stock returns contained in the CRSP database from 1926 to 2016, only 47.8% are larger than the one-month Treasury rate in the same month. In fact, less than half of monthly CRSP common stock returns are positive. When focusing on stocks’ full lifetimes (from the beginning of the sample in 1926, or first appearance in CRSP, through the 2016 end of the sample, or delisting from CRSP), just 42.6% of common stocks, slightly less than three out of seven, have a buy-and-hold return (inclusive of reinvested dividends) that exceeds the return to holding one-month Treasury bills over the matched horizon. More than half of CRSP common stocks deliver negative lifetime returns. The single most frequent outcome (when returns are rounded to the nearest 5%) observed for individual common stocks over their full lifetimes is a loss of 100%.....Rates of underperformance are highest for small capitalization stocks and, as would be anticipated based on the evidence in Fama and French (2004), for stocks that have entered the database in recent decades.... approximately 25,300 companies that issued stocks appearing in the CRSP common stock database since 1926 are collectively responsible for lifetime shareholder wealth creation of nearly $35 trillion, measured as of December 2016. However, just five firms (Exxon Mobile, Apple, Microsoft, General Electric, and International Business Machines) account for 10% of the total wealth creation. The 90 topperforming companies, slightly more than one-third of 1% of the companies that have listed common stock, collectively account for over half of the wealth creation. The 1,092 topperforming companies, slightly more than 4% of the total, account for all of the net wealth creation. That is, the remaining 96% of companies whose common stock has appeared in the CRSP data collectively generate lifetime dollar gains that matched gains on one-month Treasury bills.... When stated in terms of lifetime dollar wealth creation to shareholders in aggregate, approximately one-third of 1% of the firms that issued common stocks contained in the CRSP database account for half of the net stock market gains, and slightly more than 4% of the firms account for all of the net stock market gains...."