Why Most Stocks Will Lose You Money w/ Professor Hendrik Bessembinder (TIP667)

[@WeStudyBillionaires]

📌 Check out this video next: kzbin.info/www/bejne/fnSsgHVpZthlgNE ⚠ IMPORTANT: Please beware of cyber scams and phishing attacks. We will never ask for your contact info in the comments section. Kindly report suspicious accounts you see below. Thank you!

[@MarkPizzini]

This also explains why an S&P index fund does so well. 1) it’s market cap weighted so the best performing stocks are allocated more funds. 2) and fund managers who are trying to beat the index buy the same top performers . 3) weak companies in Dr Bs universe don’t make the index. 4) low performers are dropped from the index. No wonder John Bogel is a proponent of indexing.

[@thomaswee3439]

❤

[@Allen-L-Canada]

My thoughts exactly.

[@johnbailey3351]

While I find Dr. B's research both interesting and useful, I find one flaw in it. By attributing all of the stock market returns to a few very successful and LARGE companies, it overlooks some VERY profitable companies that were small. I have had eleven stocks bought out for cash since the turn of the millennium most for 9-11x what I paid for them. Some like Krispy Kreme Donut probably did not provide a great return over its lifetime, but did for me as I bought it at a low price, while others like Panera Bread provided great returns. Stock like these do not register with this research.

[@chrisf1600]

In his 2024 paper "Which U.S. Stocks Generated the Highest Long-Term Returns?", he ranks the annualized returns from over 28000 US stocks. Panera generated 50x returns over its lifetime, putting it at number 1307 on the list. Krispy is at number 8530 with a total lifetime return of 127%. Both figures pale into insignificance against the 2,655,289x return you'd have made from Altria :)

[@johnbailey3351]

@@chrisf1600 While MO was no doubt a great investment, the academic method of using all dividends to purchase more shares is somewhat flawed in at least two ways. First, no frictional expenses such as taxes on those dividends or buying commissions which for much of MO's history were pretty significant. The second flaw is that the average holder can't use 100% of their dividends to purchase more shares without probably greatly increasing the PE ratio and thus decreasing the positive effects of buying more shares. I read some of his earlier work, but was not aware of any 2024 paper I will have to look it up!

[@tcc447]

I am stunned no mention is made of the power and value of dividends. In many cases, companies in the study (for example Eastman Kodak) created enormous wealth solely by paying dividends over decades while the stock itself ended up at zero.

[@chrisf1600]

In his papers, Prof B calculates a figure he calls "shareholder wealth creation", which includes all cashflows paid to investors. Using his methodology, Eastman Kodak generated about 90 billion of wealth over its lifetime, or about an 8x return if you'd bought when it went public and held until the end.

[@guharup]

Whats so insightful is that ultimately in the end it all comes down to earnings growth

[@WeStudyBillionaires]

Thanks for sharing your insight! 💡

[@chrisf1600]

Imagine a company that never grows earnings, yet which pays a steady dividend of 15% pa. No growth, yet the company is already close to the top of Prof B's list. Earnings growth has zero to do with stock returns.

[@guharup]

@@chrisf1600 A company that doesnt grow its earnings has no place to invest extra capital. They they have no place to absorb their own cash flows let alone new investment. Then how is the capital gains going to be generated? This the classic case of See's Candy's that Buffet has highlighted. It provided capital for his other acquisitions, but itself never has the place to absorb any. Earnings growth has zero to do with stock returns - you are a prize idiot and have no idea what is going on.

[@chrisf1600]

@@guharup You're quite right, the stock price of my hypothetical company never changes. It has zero capital growth. But regardless, the return from holding this company is 15% pa. I may be a prize idiot, but at least I understand the difference between capital growth and total returns :)

[@MarkPizzini]

Regarding Competition. It important to make the distinction between a professional money manager and an individual investor. The money manager is by all means competing to beat the index and his peers. The individual however need not compete against the index or anyone else. The individual needs to focus on meeting their absolute return goals so they can meet their financial independence goals. By avoiding the competition to beat the index the Individual has an advantage, namely they are not forced to own stocks that are overly risky and or have gone up for the wrong reasons. They instead can focus on high quality businesses and capture solid returns while minimizing downside risks

[@123lowp]

I'm an individual investor, but I'm GREEDY and IMPATIENT. In the last month and a half, I am $118,346.01 up YOLOing on Tapestry's buyout of Capri. I'm holding 11,911.56 shares. No margin is used. Most of this is in a Roth IRA and Trad IRA, so taxes are limited on the gain. If I were to hold until the buyout completes, the gain would be $282,963.82. If the buyout does not go through, I probably lose 100k.

[@PRAVEENMARUTHURMANA]

Thanks for the insights!

[@WeStudyBillionaires]

Glad you found it valuable! 🙏

[@Feds_the_Freds]

Very important part of investing! But isn't that quite an old finding by now? When was this study?

[@123lowp]

When people talk about market performance, they are talking about the S&P 500, which is an algorithm that continually adjusts to gradually buy more of the winners and gradually sell off the losers. In certain time periods, 1/3 of stocks have been replaced in the S&P 500 in only 9 years. This algorithm replaces losing stocks with winners to drive the market higher.

[@Allen-L-Canada]

yeah, when we talk about market, we usually mean S&P. When Professor B talks about market, he means 22,000 stocks in US.

[@johndiana5276]

Excellent

[@WeStudyBillionaires]

Thank you! Cheers! 🙌

[@SB-yq8uo]

very interesting

[@WeStudyBillionaires]

Glad you think so! 💡

[@mindcache5650]

If Charlie Munger was still around today , I’ll guess he’d have one word for this ‘ research’.

[@maguilla]

Yes something in the house of turds and truffles

[@stanislavgritciuk337]

I have nothing to add

[@123lowp]

yeah 100%

[@Oggy1086]

What I dont understand is the 'skewness section' in regards to his thesis of most stocks lose money... 1. Surely two 10% up years = up 21% and two 10% down years = down only 19%...this is surely beneficial in the long run? 2. Duscussion around limited liability...can only lose 100% but can have upside of 100's%...again surely beneficial in the long run?

[@Allen-L-Canada]

i didn't get that either. I find that unuseful.

[@chrisf1600]

I agree that this finding is very counterintuitive. You're absolutely right that two 10% up years leaves you with a nice 21% gain, whereas two down years loses only 19%. But what about 10% up followed by 10% down ? That will leave you with a 1% net loss. The same is true for 10% down followed by 10% up. Assuming equal odds for "up" and "down", the mean return from this game is 0% but in 3 out of 4 cases you get a negative return ! Things get even worse as you increase the number of trials. Yes, if you get a string of "ups" you can make a huge return. But you're far more likely to get a mix of ups and downs, which will leave you with an overall loss. That's why the skewness happens. It's purely the result of compounding a +10%/-10% random coin flip over many trials.

[@survivingthetimes]

A small percentage of stocks create a good chunk of the wealth? You hadda do research to figure that out?

[@jpboil]

You don't sell your winners to buy those that are lagging. Clearly.

[@brianbirnbaum9760]

I would wager tech underperformance is skewed by pre- and post-tech bubble. So I’d avoid coming to conclusions based on that moving forward. Dangerous assumption to make. Just look at the top companies today.

[@HepCatJack]

Rebalancing doesn't make sense if the other stock is a melting ice cube. A person starting with an equal amount in SEARS and Amazon would have done better leaving his Amazon holding as it was. Selling Amazon to buy SEARS wouldn't have worked out.

[@jimjackson4256]

He didn’t really say why most stocks lose money just that they do.

[@JMXZY]

At 9:47 they discuss why

[@MarkPizzini]

Explains why Terry Smith has been so successful

[@TheBigShort11]

Or me

[@Allen-L-Canada]

only top 5% outperforms the market consistently in the long-term

[@PrimalEater]

There are high returns to be made . He’s taking about average investors.

[@christopherfairhurst978]

Hendrik’s been quite heavily cut, must’ve been umming and ahing 😂

[@safaayaanMibox]

Is it only me feeling that host voice is so irritating or it is normal voice?

[@odi8359]

Completely normal voice. But we all get annoyed at some things sometimes (myself a lot ;-)). Maybe it is indeed not his voice that is the issue.

[@brianbirnbaum9760]

Trimming the flowers to water the weeds is a very basic no no. A shame you didn’t challenge him on that.

[@Feds_the_Freds]

The flowers wont always be the flowers. What you're referring to is momenum investing. And momentum is one of the biggest factors. But indeces are already basically momentum investing. So when a stock that has a high percentage in an index declines over time or doesn't perfor as well, it will soon not have a high percentage in that index. But indeces do rebalance, because you have too "trim the flowers" at least a bit to find the small amount of flowers that may start to bloom in the weeds.

[@Allen-L-Canada]

He is passive investor, remember.

[@chrisf1600]

Here's the list of the top 10 entries from Prof B's recent paper called "Which U.S. Stocks Generated the Highest Long-Term Returns?" : ALTRIA GROUP INC (2,655,289x gain) VULCAN MATERIALS CO KANSAS CITY SOUTHERN GENERAL DYNAMICS CORP BOEING CO INTERNATIONAL BUSINESS MACHS COR EATON CORP PLC S & P GLOBAL INC Incredibly, Apple isn't even in the top 100...