Academic Alpha

Do stocks outperform Treasury bills?

Less than 43% of stocks beat Treasury bills, and just 4% account for all market gains. 🚀📊

📊 Performance

  • Less than half of individual stocks generated positive lifetime buy-and-hold returns.
  • Only 42.6% of stocks outperformed one-month US Treasury bills.
  • The top 4% of stocks accounted for all net wealth creation in the US market since 1926.
  • The median stock’s return was negative, emphasizing the impact of return skewness.

💡 Key Idea

Stock markets as a whole outperform safe investments, but most individual stocks fail to do so. Market gains are driven by a small fraction of stocks, creating a positively skewed return distribution.

📚 Economic Rationale

The findings challenge the assumption that most stocks provide a risk premium over risk-free assets. Instead, skewness in stock returns plays a major role. The small subset of extreme winners generates overall stock market gains, while the median stock lags behind.

🚀 Practical Applications

  • Portfolio Diversification is Key – Concentrated stock portfolios have a high probability of underperformance.
  • Passive Investing Works – Market-cap-weighted indices benefit from the outsized gains of a few winning stocks.
  • Stock Selection is Difficult – Investors aiming to pick winners must identify the small fraction of stocks that drive market returns.

🛠️ How to Do It

Data

  • CRSP monthly stock return data from 1926–2016.
  • Market-cap-weighted vs. equal-weighted portfolios.
  • Treasury bill returns for comparison.

Model/Methodology

  • Buy-and-hold returns analyzed for all individual stocks.
  • Wealth creation measured as market value accumulation above Treasury bill rates.
  • Skewness and concentration effects explored using bootstrap simulations.

Strategy

  • Avoid poorly diversified portfolios – Skewed stock returns mean missing out on top performers is costly.
  • Favor systematic investing – Exposure to broad market indices captures the winners without excessive risk.
  • Use historical data to inform risk assumptions – Investors should expect most stocks to underperform benchmarks.

📊 Table or Figure

📌 The top 1,092 firms (4% of the market) account for all net stock market wealth creation since 1926, while the bottom 96% of firms collectively matched Treasury bill returns.

📄 Paper Details

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