January 10, 2022

It’s the first post of the year and I’d like to provide some perspective, and depending on your point of view, some encouragement.

You probably already knew this, but just in case, I want to make it clear how picking the best stocks is extremely difficult. Over time, most stocks tend to underperform their benchmarks. It’s just a small group of stocks delivering returns that create big wealth over time.

What percent of stocks do you think that is?

According to a recent study, global stock markets have created $75.7 trillion in new wealth since 1990. However, that sum can be credited to the performance of just 2.4% of stocks.

You probably thought it was a small percentage. But that small? It’s rather eye-opening.

The study reviewed the performance of more than 64,000 stocks from 1990-2020. The compound annual return for 55.2% of all stocks during that period was less than the average return for a one-month U.S. Treasury bill, which is currently 0.03%.

In other words, most stocks are losers. Filtering to find the top performers among the many thousands of underachieving stocks is extremely difficult. From 1990-2020, the S&P 500 delivered an annual average return of 9.5%. The top 20 stocks in that time frame earned 24.2%.

Clearly, it’s best to own the winners, but picking the top ones is tough. It’s made even tougher when companies regress to the mean by not continuing their market outperformance.

And guess what? It happens all the time. Last year’s winners are this year’s losers. That’s how markets work. And nobody knows how it will shake out. That’s why it’s so tough for stock pickers.