Hendrik Bessembinder: Do Stocks Outperform Treasury Bills?

[bizman]

I just listened to Episode #532 of the Meb Faber Show podcast with guest Hendrik "Hank" Bessembinder, business school professor at ASU and author of the provocatively titled "Do Stocks Outperform Treasury Bills?" and the paper "Wealth Creation in the U.S. Public Stock Markets 1926 to 2019."

The upshot is that he says long term that most stocks lose shareholder wealth, and that a very few lead to the great long term returns of stocks as an asset class.  Very interesting discussion that makes me lean toward broader diversification rather than holding a small number of individual stocks.  

It actually dovetails with my realization that I have had a very small number of big winners with position sizes large enough to really matter to my returns, and a bunch of stocks that were at best okay to poor.

I believe there are people who can beat the market, and there are probably several here who do.  But I am less and less convinced that all of my efforts at individual stock picking are worth the effort, except perhaps in very limited cases where I feel I have a real edge and conviction.

I'm interested in other's takes on this research.  

Do stocks outperform Treasury bills?

Wealth Creation in the U.S. Public Stock Markets 1926 to 2019

Episode #532 of the Meb Faber Show podcast with guest Hendrik

[retiredat48]

Hi bizman ,...A pillar of my investing, that I recommend for all younger investors, is to forego owning any individual stocks. Take the single stock risk out of the equation. It is not necessary for success.

Instead, own mutual funds/ETFs/CEFs and let the fund managers do the stock picking. And if they end up with a bad/poorer performing portfolio, with the click of a mouse you can exit.

Here's an example of a fund I have owned since inception FSPTX Fido Select Technology, and have still not sold any...It is my largest holding. Quite concentrated with top 10 holdings exceeding 73% of portfolio:


NVIDIA Corp
17.87% of portfolio
2.6 Bil
Technology

Microsoft Corp
17.61
2.6 Bil
Technology

Apple Inc
10.46
1.5 Bil
Technology

Salesforce Inc
4.50
658.6 Mil
Technology

Marvell Technology Inc
4.32
632.2 Mil
Technology

ServiceNow Inc
4.18
611.6 Mil
Technology

ON Semiconductor Corp
4.17
609.6 Mil
Technology

NXP Semiconductors NV
4.12
602.4 Mil
Technology

Fidelity Cash Central Fund
3.20
467.6 Mil
Cash and Equivalents

Cisco Systems Inc
2.95
431.5 Mil
Technology

-------------------------------------

BTW 1) I think the facts are that the market has bettered treasury bond returns in the long run; individual investors not as well.  Most lag the market returns....

2) Bonds did reasonably well during the great depression.  Stocks crashed, which can distort or greatly affect returns since 1926.  Is a great depression in ones equation?  Is owning gold a similar hedge versus bonds?

-------------------------

Disclosures: I have not owned an individual stock for over 55 years.

Oldest daughter retiring this year, age 54, w/o ever owning an individual stock.

R48

[steadyeddy]

retiredat48, the best piece of advice "No Individual Stocks." Thank You!

[Norbert]

"Summing across the 63,785 firms that issued common stock contained in the January 1990 to December 2020 sample ..."

The study includes ALL companies that issued common stock during the period! We may conclude that it's not a brilliant idea to randomly buy stocks regardless of company performance record or market capitalization.

The picture changes if we limit ourselves to individual stocks included in the S&P 500; in other words to established, proven companies.

Since 2004, the equal-weight S&P 500 index has slightly outperformed the market-cap weighted S&P 500. I conclude that the average individual S&P 500 stock has done much better than T-Bills.

(I compared the ETFs RSP and SPY.)

Of course, not every S&P 500 individual stock will offer good returns going forward. That's why we diversify ... or live with the risk of having picked an underperforming stock. But, that's another subject.

I see no reason not to invest in individual stocks, if so inclined. Just don't do it randomly using the entire universe of common stocks.

[mnfish]

Here's a chart from NYU/Stern although it starts in 1928 and uses the SP500 and - pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html

[steelpony10]

     Over the first 30 years I saw single growth stocks of the most solid companies although with more volatile values easily beat everything over time. The unpredictability of those values sometimes over long periods like now make single stocks seem inappropriate for the 15-20 year average retirement. They could be an option for sudden increases in monthly income needs beyond 15-20 years or maybe a “safer” index fund as we chose.

      I see no value in dividend stocks for us because if one spends down you destroy the cash flow or you never benefit from cap gains if you don’t. They simply didn’t provide an income stream that met our needs, took a larger investment and provided little breathing room for inevitable surprises during retirement.

       In regards to the OP I think just growth stocks (or a more appropriate index) along with high yield investments (I used utilities for my parents and in-laws) would be a good long term combination. Of course it’s all risk and lifestyle adjusted. More risk = more reward and volatility.

[Chahta]

I’m not sure what the point is. I‘m quite sure I have not done the best but am sure I’ve done well. I retired, have a healthy savings, and can afford to support myself. If I had been able to save more I would have more today. I think it’s the urge to constantly get more and do better that hurts a portfolio. I learned a good lesson in the last black swan; buy good quality funds and hold them in approximately 50/50 mix. M* will help you find good funds (plus you people here too). Bond funds will keep paying interest even though the principal can decline. Just reinvest if you can and build a powerful income machine. But I am also lazy. I don’t care about researching individual stocks or care about learning how to do it. More power to you good stock pickers and good luck.

[Chahta]

Good post steelpony10. I might disagree mildly about stocks not providing enough income. If you are talking individual stocks vs. funds then I agree. My mom gets flooded with equity fund income every year. Enough to keep her IRMAA up. She never owned a bond other than some GINNIE MAE fund shares.

[steelpony10]

Chahta ,

       Stocks are good if you can chose well and especially hold on or add to them during market lulls. I only meant growth stocks. Also if you have 500k and your needs are 10k a year as a retiree I’d stick with Warren Buffet, VOO and cash. Heaven help you if you encounter later life issues and you were the brains of your portfolio management though.

        I still think all my remaining savings will go to a LTC facility, my kids, or my wife’s gold digging boyfriend. That’s why I go for no brainer cash flow now. I’ll probably never need values. Maybe I’ll just die well off. Big whoop.

         In regards to the OP I’m pretty sure early 1k investments in MSFT, AAPL and INTC (whose value was converted to AMZN during the bank crisis) provided above average returns since the late 80’s. Of course conventional bond yields (losing purchasing power at the moment) are easy to beat long term.

          I agree conventional bonds are trash like dividend stocks. That leaves leveraged growth stocks and bonds (oh boy) or a nice balanced index fund with skinflint spend down. ✌️

           

          

[johntaylor]

The name "Hendrik Bessembinder" has an impressive ring to it.

If I were a college president, I'd hire him without bothering to read his CV.

[retiredat48]

May 10, 2024 20:58:27 GMT johntaylor said:

The name "Hendrik Bessembinder" has an impressive ring to it.

If I were a college president, I'd hire him without bothering to read his CV.

+1...

So does the name R48.

Thanks to those who have sent to me gifts with R48 monogrammed on them, such as golf shirts.

I wear them out in society often, and they make good "conversation starters!"

R48

[yakers]

May 7, 2024 13:24:50 GMT bizman said:

.  But I am less and less convinced that all of my efforts at individual stock picking are worth the effort, except perhaps in very limited cases where I feel I have a real edge and conviction.

Maybe 25 years ago I was getting into investing so I took $20K (a lot for me at the time) and openned a trading account, for a couple years I traded (yes, I know this is not a long time). I did beat the S&P500 risk adjusted, but not by much. The insight I had was that I had a good sense of buying but I could not decently figure out when to sell, so I should't be a trader since selling is probably more important. And it took a lot of time and effort. Definitely not worth the effort. So I stayed with index and balanced funds (could never figure out trading bonds although a friend of mine was a profesional bond trader). 

I still keep a small trading account to keep me diverted but would never put my larger portfolio at risk.

[win1177]

Agree with some of the other posters, buying individual stocks is more of a “crap shoot” and can hurt one’s returns over the long term. Looking back at my “investing career”, I’ve had a few “home runs”, where I bought an individual stock that grew into a huge position, but for the vast majority of the “trades”, I’ve been average (at best). Two of my biggest “home runs” are APPL (cost basis of $30K, worth $750K now) and MSFT (cost basis of 16K and worth 730K). Those few “home runs” help my returns, but probably lead me to continue to invest in individual stocks MORE than I should.

Now, in my older and (hopefully) more”mature and rational” investing age, I am TRYING to force myself to limit trades to broad well diversified mutual funds/ ETF’s, rather than individual stocks. There have been plenty of other “marginal” or downright “stupid” trades over my 45 plus years of investing that have demonstrated that, over the LONG run, it is smarter for me to invest in well diversified mutual funds/ ETF’s and hold for the long run, than to try and pick the next “AAPL, MSFT, or NVDA”.

I do disagree with the criticism of dividend stocks, I think they can be very good long term holdings. A long history of paying rising dividends every year, for at least 10 years, seems to predict a company with a wide moat, continued growth prospects, and a good long term outlook. The main “downside” is they end to be more “expensive” than the average company/ stock, and thus I have to wait a while to try and pick them up when they go “on sale”.

Just my two cents! Win

[Chahta]

May 8, 2024 5:05:09 GMT Norbert said:

"Summing across the 63,785 firms that issued common stock contained in the January 1990 to December 2020 sample ..."

The study includes ALL companies that issued common stock during the period! We may conclude that it's not a brilliant idea to randomly buy stocks regardless of company performance record or market capitalization.

The picture changes if we limit ourselves to individual stocks included in the S&P 500; in other words to established, proven companies.

Since 2004, the equal-weight S&P 500 index has slightly outperformed the market-cap weighted S&P 500. I conclude that the average individual S&P 500 stock has done much better than T-Bills.

(I compared the ETFs RSP and SPY.)

Of course, not every S&P 500 individual stock will offer good returns going forward. That's why we diversify ... or live with the risk of having picked an underperforming stock. But, that's another subject.

I see no reason not to invest in individual stocks, if so inclined. Just don't do it randomly using the entire universe of common stocks.

Speaking of "randomly", wasn't there a person that had a chimpanzee throw a dart and pick stocks? Seems as though he did as well as most do.

www.guinnessworldrecords.com/world-records/most-successful-chimpanzee-on-wall-street

[retiredat48]

win1177 ,...yes, with the advent of "technology" there have been some huge winner individual stocks such as your AAPL. So is foregoing buying individual stocks a poor practice? Shoot for the moon somehow.

Well, here's an interesting fact. I have been promoting that if forced to pick a stock, for last decade, I have been saying Amazon...and a year ago added NVIDIA. I own neither directly. (wished I had).

However, lets consider top-stock NVIDIA. This company is showing up in many of my fund holdings. Most notably my (and daughter IRA) largest holding FSPTX, now about 20% NVIDIA. Combined we now own more than $125,000 worth of NVIDIA. Seems like enough exposure to me!

BTW I notice many funds are buying NVIDIA even if outside the fund structure. Like it is showing up in Asia/Pacific themed funds!! What a stretch.

Most mutual fund/ETF investors thus have a piece of NVIDIA!

R48

[johntaylor]

One of my holds is a stodgy old balanced fund (1939 inception).

As of April 30, 2024, it was 2.1 percent NVIDIA.

And 2.8 percent Microsoft, 1.9 percent Apple, and 1.7 percent Amazon.

[FD1000]

Stocks usually beat bonds, unless you select a specific date way in the past because you know that 1929-1932 was the worst time for stocks.