Whenmentioned about stocks, we automatically say that they’re for the long run. We dole out analysis and crunch numbers that substantiate this thesis. While stock market is generally accepted as a means of wealth creation, stock performances and the outcomes present an asymmetry. There’s an interesting paper published by Hendrik Bessembinder in ‘the journal of Financial Economics’, 2018 where he deceptively poses a simple question. Do individual stocks, on average, outperform Treasury bills over long periods?
Most investors assume the answer is an unequivocal ‘yes’, because the stock market, as a whole, delivered strong returns. But, through the paper, he shows that the reality is far more concentrated. The original paper covered nearly 26,000 stocks from 1926 to 2016 and recently was updated for a hundred-year data till 2025. The result is that just 46 stocks accounted for half the $91 trillion of wealth created across the entire US market during this period. That concentration has increased since the original study. In 2017, he found that 89 stocks accounted for half the wealth created.
So, only 4 per cent of the listed universe created all the net wealth generated by the US stock market during the period. The remaining 96 per cent collectively performed no better than short-term treasury after accounting for the enormous gains generated by a tiny minority of exceptional companies. The contribution of top 50 companies is disproportionately large with the top 5 companies contributing over 10 per cent of the total wealth created.
Does that mean, it’s not worthy of investing in stocks. No, that’s not what the author argues. The paper starkly highlights that the stock markets are highly skewed and the distribution of stock returns resembles a venture capital. Most stocks deliver mediocre returns while many lose money. Only a tiny fraction of stocks generate extraordinary wealth. The winners are so dominant that they determine the returns of the entire market. So, owning the market is fundamentally about owning a few future superstars.
One of the most surprising aspects of the research is that the median stock doesn’t beat treasury bills and underperforms one-month T-bill over its lifetime. In other words, buying a random stock historically gave worse results than holding risk-free cash equivalents. The equity premium exists at the aggregate market level and not for the average stock. This overturns a common misconception in investing.
As a handful of companies generated enormous portion of total shareholder wealth, the top performers compounded for decades, creating returns that overwhelmed the poor outcomes of the thousands of other firms. Therefore, the market’s long-run return depends on capturing a few massive compounders. The paper attributes this to the mathematics of equity investing – losses are bonded i.e., a stock can fall at most by 100 per cent but gains are unbounded i.e., stock can rise by 10x, 100x, etc. These rare extreme winners create a positively skewed distribution.
It’s, thus, important to understand the difference between market returns and stock returns. The average long-run return (of 10 per cent) is a portfolio-level fact, not a stock-level expectation. Diversification is more important than stock picking. Missing a handful of future winners can severely damage long-term outcomes. This provides for a strong academic argument for broad index funds, total-market investing and global diversification rather than concentrated portfolios. This brings up the quote by Jack Bogle of Vanguard, ‘Don’t look for a needle in the haystack. Just buy the haystack!’
This also poses a structural challenge to active investing. The challenge isn’t merely beating averages; it’s owning the tiny subset that matters and if one must identify those rare winners. Also, patience is essential. Many wealth creators (stocks) require decades to reveal themselves. The findings reinforce long holding periods and low turnover as the biggest gains often come late in the stock’s life cycle.
Data suggests that attributes like economic moats and dividend stability are common among the superstar stocks. Great businesses with durable competitive advantage tide over economic cycles and compound wealth over the long run. Although the study examines US markets, the logic likely extends elsewhere. Probably, the deepest lesson from the paper is: the stock market’s long-term success is not broad-based. It’s driven by an exceptionally small number of extraordinary companies. For investors, it means: the primary objective is not merely avoiding losers – it’s ensuring that you own the rare winners when they emerge.
(The author is a partner with “Wealocity Analytics”, a SEBI registered Research Analyst and could be reached at [email protected])
