Podcast Review | Why Most Stocks Will Lose You Money w/ Prof. Hendrik Bessembinder

Why Most Stocks Will Lose You Money w/ Prof. Hendrik Bessembinder

Professor Hendrik Bessembinder is a financial markets professor from the Arizona State University who has published a series of research papers analysing data of both US and international stock markets. The study which he discusses on this podcast episode is principally associated with analysing performance data of the US market for the period 1926 to 2022. A few key findings from his research include:

• Due to the laws of compounding, positive skewness exists within markets, whereby a few outperforming companies drive the group average higher by more than overcompensating for the majority of companies which underperform.
• A study of 25,000 companies created ~US$35 trillion in net wealth. The top 4% of companies accounted for all of this wealth creation, hence 96% of companies did not contribute at all. The fact is that the majority of individual stocks do not outperform the compounded returns of treasuries over the long term.
• Companies with founder CEOs tend to outperform whilst even the best performing companies had experienced significant downturns.
• The technology sector was no more or less likely to be a sector producing superior outperformers vs any other particular sectors.

Based on the results of his research, Bessembinder believes that investing in a passive index fund akin to the venture capital investing approach where there will be only a few winners that offset the a significant number losers. The difference between them is that venture capital investors are more likely to understand this asymmetry prior to investing whereas passive equity index investors may not. Furthermore, the reweighting that occurs by passive index funds is effectively a form of diversification. Despite all the perceived negatives, stocks have consistently outperformed treasuries on the average over a long period of time.

For those looking to apply this research into their own investing journeys, what should we do? Focusing on companies delivering consistent growth, increasing their cash balances and focusing on fundamental analysis is Bessembinder's view. Furthermore, multiple expansion is likely to be a factor as for those companies which demonstrated strong outperformance over a long period of time had relatively high earnings multiples at the end of the decade(s) which was relevant to their period of outperformance.

Link to Podcast

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