How to Manage the Best Stocks

There are concepts that you hear about in life that make sense when you read about them.

Occam’s Razor. The 80/20 rule. Murphy’s Law. Index funds.

Indexing made sense to me right off the bat. Low cost. Tax efficiency. Low income. Low maintenance. It’s easy. And it is very difficult to win long term (even for professional money managers).

I have been investing in index funds for over 20 years. If anything the case of targeting has only found it stronger at that time.

My basic expectation has always been that index funds will outperform something like 70-75% of actively managed funds.

The SPIVA scorecard shows over 10, 15 and 20 years in recent decades that it has matched 90% or more of a range of stock market trends:

One of the reasons I like index funds is because picking stocks is hard. Indexing allows you to cast a wide enough net to make sure you catch the big winners, more than just returning the big losers.

I didn’t fully understand how focused the comeback was on the winners until I read the work of Hendrik Bessembinder. In 2018, Bessembinder was published Are Stocks Better Than T-Bills?

His research found that over the long term:

• About 60% of all stocks performed below expectations for T-bills.
• Most other stocks don’t perform well over the money.
• About 4% of the stocks make up the bulk of the total gains.

This study was like confirming bias on steroids in indexers. I knew the stock market was highly concentrated but I didn’t know it was this it is concentrated. This is a great investment for index funds because you automatically own the big winners. And those carts tend to be big.

Bessembinder released an update on his findings last week in a new paper titled One Hundred Years in the US Stock Market. Over the past decade the long-term benefits of the stock market have become more concentrated:

In the period from 1926 to 2016 studied in Bessembinder (2018), 89 firms accounted for $43 billion in wealth creation. After including the results of the most recent nine years, just 46 firms accounted for $91 billion in net wealth creation over the course of a full century.

My new research assistant Claude compiled the data from his research into a visual representation.

Here’s a better look at how the markets are manipulated by the biggest winners:

It is almost impossible to understand how much money was created by such a small company.

Here’s another way to look at this as a percentage of wealth created using the original study and updated numbers:

From 1926-2025 only 208 companies made up 75% of the wealth in the stock market.

Here’s a breakdown of how many stocks beat T-bills over 10-year increments:

The win rate over the last 40 years has been remarkably stable at around 50%, meaning that half of the companies hit cash while the rest failed to meet the risk-free rate.

Of course, this study is a lot long term. Individual stocks may still experience gains before trailing behind. Not every investor is the buy and hold type. There are other possibilities in between.

And index funds are nothing special. There are other ways you can build tax-free, long-term investment strategies within a simple, rules-based framework.

I am not saying that indexing is the only way to invest.

But the data shows why index funds are so hard to beat over the long term.

Michael and I talked about Bessembinder’s research, the best stocks in history and much more in this week’s Animal Spirits video:

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Further reading:
Debunking the “Passive is a Bubble” Myth.

Now here’s what I’ve been reading lately:

Books: