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Bessembinder, H, 2020, Wealth Creation in the US Public Stock Markets 1926 to 2019

Posted on 2 mins read

Abstract

Studies whether stock market returns increase or decrease shareholder wealth relative to Treasury bills. Concludes that just 5 firms account for 22% of net wealth creation.

Bottom Line / Implications

Basically, the median stock underperforms Treasury bills over comparable periods.

The average return is higher, but that average is driven by a minority of stocks. Link below states 50% of shareholder wealth creation is driven by 86 stocks out of a universe of 26000 stocks.

Implications are:

  • If you can pick the right stocks, you’ll dramatically outperform the market
  • If you miss the right stocks, you’ll underperform the market
  • The ‘right stocks’ are a tiny minority. If you don’t have strong convictions on what they are, you should probably hold all the stocks.

Notes

Introduction

Shareholder wealth created includes net cash distributions, buybacks etc.

“The concentration of SWC documented here is attributable to positive skewness in the distribution of long run stock market outcomes… this implies that undiversified portfolios selected at random will underperform the overall market more often than not.”

If you can pick stocks, concentrating could lead to outsize gains. If you can’t, hold everything (don’t randomly sample), in case you miss a whale.

Methods and Data

SWC focuses on cash flows to (dividends etc) or from (share issuance) shareholders in aggregate. First market cap observation is viewed as cash flow from shareholder; final one is cash flow to shareholders. Benchmark to beat is treasury rate for the month. Computed monthly.

SWC is related to economic value add (EVA) but uses treasury rate rather than firm bond yield and market beta cost of capital.

Computing SWC requires data on stock market returns, share prices, shares outstanding, and T bill rates.

Stock data is from CRSP. T Bill data is from French’s website

Discussion

Dudu covers 1926-2019.

±26000 companies. 42% has +ve SWC; 58% reduced it relative to T bills.

Tech stocks have highest aggregate SWC, but also most stocks. Highest SWC/firm is Telcos, then Pharma.

Last 3 years (2016-2019) were particularly concentrated. Author concludes SWC concentration has increased in the last few years.

Further Reading & Links