Stock Picking Is A Losing Bet

Many of us at Greenspring used to be in the stock picking game.  It was really hard.  While our experience may have been anecdotal, there is new evidence coming out to support the idea that stock picking is a low probability strategy.  The Value Walk blog has posted a very interesting study on this topic.  Here are some of the major findings:

  • Since 1983, the US stock market has consisted of 8,054 publicly traded stocks (including delisted stocks)
  • 39% of stocks since 1983 have lost money
  • 64% of stocks underperformed the Russell 3000 during their lifetime
  • 18.5% of stocks lost at least 75% of their value over their lifetime

If you are keeping track at home, that means that you have a 1 in 3 chance to pick a stock that outperforms the index.  When I first read these statistics, I was astonished.  I figured that it should be about a 50/50 chance, since half the stocks should outperform and half should underperform.  The data tells us something different.  What we find is there is a very small contingent of stocks that have HUGE returns, while nearly 2/3rds failed to keep pace with the index.  To put it another way, index returns are significantly influenced by just a small group of winners.  If you don't happen to have some of these winners in your portfolio, you have a high probability of underperforming.  Here is a really interesting chart:

ind stock vs index

The chart shows that only about 6% of all the stocks significantly outpace the index, but they have a huge influence on the overall returns of the index.  What is the chance that you will be able to pick one or more of the stocks?  In looking at it from an attribution standpoint, it is even more astonishing. 25% of the stocks in the US over the past 30+ years have accounted for ALL of the gains!


When you start to understand the math and statistics behind stock picking, it should become increasingly clear that owning the entire market is a much safer and prudent strategy than trying to concentrate your bets.  


Information contained herein has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. It is not intended as the primary basis for financial planning or investment decisions and should not be construed as advice meeting the particular investment needs of any investor. This material has been prepared for information purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results.