Do Stocks Outperform Treasury Bills?

No! Emphatically, vehemently, unmistakably no! Prof Hendrik Bessembinder's fascinating and exhaustive analysis cogently demonstrates the difficulty futility of trying to pick stocks. The full paper is here. 

Bessembinder evaluated the lifetime returns of every U.S. common stock traded on the New York and American stock exchanges and the Nasdaq since 1926; which tallies to 26,168 firms. And the key findings were (drum roll...):

1. Between 1926 and 2017 U.S. stocks increased shareholder wealth by $35 trillion (yay!). But just 86 stocks accounted for $16 trillion in wealth creation, half of the stock market total (whoa!!).

2. All of the wealth creation can be attributed to the thousand top-performing stocks, while the remaining 96 percent of stocks collectively matched one-month T-bills.

3. ~58% of stocks actually decreased shareholder wealth.

The chart below highlights the key findings and the stocks that generated the most wealth over the last 90 years (click to enlarge). Not surprisingly, Tech firms generated the most wealth, though Energy, Telecom and Healthcare generated wealth disproportionate to the number of firms in the industries. The Champions: Apple, ExxonMobil and Microsoft. 

The results highlight the "skewness" of stocks. Returns from long-term stock investing are positively skewed, i.e., very large returns from a few stocks pull up the average. Most stocks actually have negative returns.  

The takeaway: “The results help to explain why active strategies, which tend to be poorly diversified, most often underperform.”- Bessembinder. So passive strategies (index funds or ETFs) are your best bet. To paraphrase Jack Bogle, the pioneer of index investing, don't go try to find the needle in the haystack, just buy the haystack. 

Note: An updated list through 2019 has the following companies (lifetime wealth produced, year publicly listed):

1. Apple             ($1,600 billion, 1981) 
2. Microsoft       ($1,400 billion, 1986)
3. ExxonMobil   ($990 billion, 1926)
4. Amazon          ($865 billion, 1997)
5. Alphabet         (720 billion, 2004)