One stat shows how hard it is to pick market-beating stocks – Yahoo Finance
A version of this post was originally published on TKer.co.
Picking stocks in an attempt to beat market averages is an incredibly challenging and sometimes money-losing effort. In fact, most professional stock pickers aren’t able to do this on a consistent basis.¹
One of the reasons for this is that most stocks don’t deliver above-average returns.
According to S&P Dow Jones Indices, only 22% of the stocks in the S&P 500 outperformed the index itself from 2000 to 2020.
“When a randomly chosen stock has roughly one chance in five of beating an index fund, successful stock selection is very difficult,” Craig Lazzara, managing director at S&P Dow Jones Indices, wrote earlier this year.
Over that measurement period, the S&P 500 gained 322% while the median stock rose by just 63%.
It’s worth noting that if you had a portfolio of stocks consisting of mostly underperformers and a few outperformers, this wouldn’t necessarily mean you’d be underperforming the index.
“This is because stock market returns tend to be positively skewed,” Lazzara noted. “Rather than being symmetrically distributed around an average, return distributions typically have a very long right tail; a relatively small number of excellent performers has a disproportionate influence on the market’s overall return.”² (emphasis added)
In other words, if your outperformers are way out on the right tail, then they might more than offset all of the underperformance of the other stocks.
Unfortunately, no one has a great track record at identifying the stocks that’ll become “excellent performers.”
And 2021 hasn’t strayed too far from this trend.
In commentary circulated on Friday, Lazzara observed that only 42% of S&P 500 stocks outperformed the index through November. The median stock was up 19%, whereas the index was up 23%.
To be clear: There’s nothing wrong with investing in specific businesses you believe in or stocks you think offer some extraordinary value.³
However, if your intention is to beat the market, you should manage your expectations.
ICYMI, here’s some recent stuff from TKer:
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In markets, when everyone’s worried about the same thing… well… then it’s probably too late to start worrying about it now. (Link)
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Everyone was surprised to see corporations report record profit margins this year despite inflation. …….