Author Topic: 58% of common stocks have holding period returns less than those on Treasuries  (Read 2369 times)

Yankuba

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Interesting study here:

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2900447

"Most common stocks do not outperform Treasury Bills. Fifty eight percent of common stocks have holding period returns less than those on one-month Treasuries over their full lifetimes on CRSP. When stated in terms of lifetime dollar wealth creation, the entire gain in the U.S. stock market since 1926 is attributable to the best-performing four percent of listed stocks. These results highlight the important role of positive skewness in the cross-sectional distribution of stock returns. The skewness in long-horizon returns reflects both that monthly returns are positively skewed and the fact that compounding returns over multiple periods itself induces positive skewness. The results also help to explain why active strategies, which tend to be poorly diversified, most often underperform."

Discussed on Marginal Revolution:

http://marginalrevolution.com/marginalrevolution/2017/02/sentences-ponder-please-diversify.html#comments

Similar article here:

http://www.valuewalk.com/2015/11/39-of-stocks-have-a-negative-lifetime-total-return/

Also discussed at Bogleheads:

https://www.bogleheads.org/forum/viewtopic.php?f=10&t=209916&newpost=3220347
« Last Edit: February 02, 2017, 07:02:26 AM by Yankuba »

radram

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Interesting study here:

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2900447

"Most common stocks do not outperform Treasury Bills. Fifty eight percent of common stocks have holding period returns less than those on one-month Treasuries over their full lifetimes on CRSP. When stated in terms of lifetime dollar wealth creation, the entire gain in the U.S. stock market since 1926 is attributable to the best-performing four percent of listed stocks. These results highlight the important role of positive skewness in the cross-sectional distribution of stock returns. The skewness in long-horizon returns reflects both that monthly returns are positively skewed and the fact that compounding returns over multiple periods itself induces positive skewness. The results also help to explain why active strategies, which tend to be poorly diversified, most often underperform."

Discussed on Marginal Revolution:

http://marginalrevolution.com/marginalrevolution/2017/02/sentences-ponder-please-diversify.html#comments

Similar article here:

http://www.valuewalk.com/2015/11/39-of-stocks-have-a-negative-lifetime-total-return/

Also discussed at Bogleheads:

https://www.bogleheads.org/forum/viewtopic.php?f=10&t=209916&newpost=3220347

I agree. Very interesting.

However, 20 years ago, I might have bought sears, kodak and IBM. IBM would have been ok (about 12% annual return). How about the other 2?

What would you buy today? Are you "right"? Only future me can tell you. For me, this thread strengthens my need to buy the market instead of choosing stocks with the bulk of my stache.

I do still buy stocks, with fun money. I've done ok (translation, I have never figured out if outperformed the market, but I am still having fun).

Proud Foot

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Radram, since you mentioned Kodak I will point you to this case study by Joshua Kennon.  He calculated in the 25 years starting in 1986 that Kodak had a 5.5% return, even when accounting for losing your initial investment.  His calculation included not reinvesting the dividends and not selling before the shares were delisted.  I'm sure you would have a higher return if you were able to sell before they were delisted.

edit to fix link format
« Last Edit: February 03, 2017, 12:08:23 PM by Proud Foot »

radram

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Radram, since you mentioned Kodak I will point you to this [url = http://www.joshuakennon.com/eastman-kodak-example/] case study [/url] by Joshua Kennon.  He calculated in the 25 years starting in 1986 that Kodak had a 5.5% return, even when accounting for losing your initial investment.  His calculation included not reinvesting the dividends and not selling before the shares were delisted.  I'm sure you would have a higher return if you were able to sell before they were delisted.

Thank you for that research. Fasinating study. He is a great writer. Did you see his article on Dolly Parton? A must read. I have his article on MLK's Birmingham jail letter in my queue.

As far as Kodak, I would have reinvested dividends, so that would need to be re-figured. As far as the signs to get out, I remember getting a digital camera from Kodak around 2003-2005 or so, and I might very well have figured they would transform into a digital company. Who knows If I would have seen the writing on the wall.

By the same token, would I have left IBM when everyone wrote them off, missing the turn-around and all the gains that took  me to 12% overall?

I'm not that good. I very well might have missed both :)

Proud Foot

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That's the beauty of hindsight! If you were to reinvest all your dividends in Kodak it would definitely change it as all you would have left is the Eastman Chemical stock.  I probably would have missed both as well.  Probably would have sold out of Kodak before realizing a total loss though. 

Yes I did read his article on Dolly Parton! I can't remember how I found him but I have certainly enjoyed and learned a lot from his different posts.  Disappointed that he took some down with the development of his investment management company as I had several bookmarked for that are no longer there.