I recently saw an article in The Globe and Mail published on May 15, 2017 and written by Jeff Sommer of the New York Times News Service. The title was “Hot stocks can make you rich, but they probably won’t.” Probably the most basic point of the article was that even though you think it’s easy to pick great stocks, it really isn’t.
Sommer notes that “before you jump headlong into stock picking, you may want to consider the odds.” He points out that even in the strongest bull markets, most stocks just do not keep up. We have all heard a million times the “high tide lifts all ships” analogy. Of course the tide lifts all ships, but a bull market does not lift all stocks.
The author cites a recent study by Hendrik Bessembinder, a professor of finance at Arizona State University. Professor Bessembinder found that individual stocks resemble lottery tickets. While he found that a very small percentage of stocks have done extremely well, over the long term, most have not had any positive returns at all.
In fact, 58% of individual stocks since 1926 have failed to outperform one-month treasury bills over their lifetime. In addition, he found that only 4% of stocks accounted for all market returns from 1926 through 2015. In terms of statistical analysis, the stock market has a “positive skew.” A relatively small number of stocks have such good performance that they have a significant impact on “average” performance. The average return is higher than the median return.
So, for those of us investing our money in the market, what does this mean? What can we learn from it? Does it mean that trying to be your own portfolio manager is an exercise doomed to failure? No, but the odds against being truly successful are astronomical.
I think the takeaway from this research is that it is better to own the entire “collection” than it is to try to personally pick some personal favourites. That goes a long way in explaining the popularity of index funds. The evidence seems to be clear that the vast majority of people would have better investment results investing in market indices rather than in individual stocks. But is that the end of the story?
To me, this research confirmed what I have believed over my investing life, and that is the key to success is to find people who have demonstrated the ability to find those rare “nuggets” in the market consistently, over time. Being able to do that means that over the long term, your returns will be better than the benchmark (the market). Our task at HG Partners has always been and will always be to do our best to find those people.
President, HG Partners Limited
Director, Private Client Group &
Senior Financial Advisor,
HollisWealth Advisory Services Inc.
This article was prepared solely by Howard Goodman who is a registered representative of HollisWealth Advisory Services Inc. (a member of the Mutual Fund Dealers Association of Canada and the MFDA Investor Protection Corporation). The views and opinions, including any recommendations, expressed in this article are those of Howard Goodman alone and they are not those of HollisWealth Advisory Services Inc.
HollisWealth is a trade name of HollisWealth Advisory Services Inc. ® Registered trademark of The Bank of Nova Scotia, used under license.
HG Partners Limited is an independent company. Scotiabank companies have no liability for activities outside of HollisWealth.