Episode 38
Stock Market Insights: Why a Few Stocks Drive Long-Term Gains

Table of Contents

• Introduction
• Summary of the Article
• Why a Small Percentage of Stocks Drive Gains
• Challenging Common Assumptions About Investing
• Why Many Stocks Have Negative Returns Over Time
• The Significance of Compounding in Returns
• Identifying Future High-Performing Stocks
• Influence on Long-Term Diversification Strategies
• Role of Technology Stocks in Future Gains
• Conclusion

Introduction

Madison: Hello, everyone, and welcome to Not Just Numbers—Honest Conversations with a Financial Advisor and Lawyer. I am Madison Demora, and I am here with Mike Garry. Mike is a financial advisor and a CFP practitioner and the founder and the CEO of Yardley Wealth Management. He is also an estate planning lawyer, and his law firm is Yardley Estate Planning. Hey, Mike.

Mike: Hey, Maddie. How are you?

Madison: I’m good. How are you?

Mike: Good.

Summary of the Article

Madison: All right. So today we are going to discuss an article Mike found in the Courier Times, and it is titled “Stock Market Wins Surprise Researchers,” and that is by Russ Wiles. All right, so here’s the summary of the article:

The article highlights a study by Dr. Hendrik Bessembinder, showing that a small number of stocks drive most long-term stock market gains. Analyzing nearly 29,100 stocks from 1925 to 2023, Bessembinder found that just over 4% of stocks account for all net wealth growth, while most underperform. Companies like Altria and Nvidia generated substantial returns, demonstrating the power of compounding. The study suggests that successful stocks tend to have strong management and competitive edge. It also supports index investing, as picking individual winners is difficult, and owning a broad index captures future high performers.

Why a Small Percentage of Stocks Drive Gains

Madison: All right, Mike, so why do you think such a small percentage of stocks drive the majority of long-term gains in the market?

Mike: I think it’s mainly due to the creative destruction of capitalism. It’s just the way that it works. It’s really hard to start a business, and then it’s hard to take it so it’s big enough to be publicly traded. This study goes back 100 years, and there’s only 29,000 companies that got to be large enough at one time to be traded on the stock market. There’s millions of companies in the country. It’s really hard to get to that point where your company is big enough and financially strong enough to trade on a stock exchange. And then those same forces that make it so hard to get there make it so hard to stay. You know, it’s ruthless, and it’s just the way that it is. So it’s probably surprising to some people, but not surprising if you follow the stock market. You see names come up, see them go, and then there’s other names that have been around forever, like Altria—which used to be Philip Morris—or J&J or Boeing or General Electric. Yeah, it’s interesting.

Challenging Common Assumptions About Investing

Madison: Yeah. All right, so how does Bessembinder’s study challenge common assumptions about stock market investing?

Mike: Sure. I think that a lot of people misunderstood Jeremy Siegel’s book from the nineties, Stocks for the Long Run. So Jeremy Siegel is a Penn professor, and he’s a longtime proponent of investing in stocks. And he has researched the last 200 years or so—or 220 years now—of stock market returns throughout the world. And what he says is that stocks as a whole have outperformed inflation and other investments during that time. But what I think—you know, this book came out when I was back in my Merrill days and the end of the nineties, tech stock mania. And I think that a lot of people think that Stocks for the Long Run just means if you buy and hold a stock, it’s going to wind up being a good investment. But the actual thing is buying stocks as an asset class is what is important.

So it’s not just going out and thinking, “Oh, I like this stock, and I think I’m going to hold it.” Like right before that, Stocks for the Long Run, Peter Lynch, the big Fidelity Magellan manager who did a great job from 1978 to 1990 for their biggest fund and had great returns—like beat the S&P 12 or 13 years in a row—he would tell people to buy what you know. So if your kid likes Nikes and, you know, Nike, buy that. Well, that might be advice if you can actually do the research like he did, and you invest in a time when retail stocks did the best, like he did. But it doesn’t really work most of the time and for most people. Just because you like to buy your clothes at X brand doesn’t mean that that’s going to be a good investment.

The whole point of Jeremy Siegel’s research and the research that this professor did is that stocks as an asset class provide good returns. But it’s hard to pick an individual stock. Most individual stocks don’t perform all that well. And so just going and picking some random stock or some stock because you like their branding or their clothes or something is not a good idea.

Why Many Stocks Have Negative Returns Over Time

Madison: Yeah. All right. So what factors might explain why many publicly traded stocks have negative returns over time?

Mike: Yeah, I think it’s hard. Usually when stocks go public, they get introduced to the markets by one of the Wall Street banks—or sometimes many of the Wall Street banks—who make a lot of money for getting to go public. And then, we’ve never bought IPOs because IPOs have negative returns associated with them in the first year. So what that means is that when a stock goes public, it’s more likely to have a negative return that first year than a positive return. So we’ve never bought IPOs. And I think that, yeah, it’s just part of the broader picture that it’s hard. And not many companies can make it to that space. And then once you get to that space, not many can make it for the long run.

The Significance of Compounding in Returns

Madison: Okay. What is the significance of compounding in stock market returns, as illustrated by companies like Altria and Vulcan Materials?

Mike: So, in the article, the professor showed that Altria had the biggest returns over that period, and Vulcan had the second. And who would think of that now? Altria, people my age or older know is Philip Morris, the cigarette brand. They changed their name a while ago. But Vulcan—people don’t know that, right? I think that’s the second best return in the last hundred years in the stock market. But what it showed was Altria’s return has been 16% and change per year. Vulcan’s has been 14% per year. And if you started with a dollar at the beginning of the time period, the dollar in Altria would be worth, like, two and a half million. And even though it’s only, like, 2% less per year, the Vulcan would be worth like 300-some thousand dollars. So that 2% compounded for 100 years made the Altria worth eight times as much as Vulcan, the second most valuable. That’s really something.

Identifying Future High-Performing Stocks

Madison: Yeah, that is really something. So do you think it’s possible to identify future high-performing stocks in advance, or is it more effective to rely on broad market indexes, and why?

Mike: Yeah, I think it’s really hard to tell what is going to be in advance. And I could say over the 25 or 26 years I’ve been in this industry, I’ve had people come up to me with dozens or hundreds of stocks that they thought were going to go great. And I’m sure some of them did. But mostly those names are forgotten. And after a while, you could say Apple or Microsoft or Nvidia has shown that it has been a great investment. But, you know, Apple languished for years before it became a great investment. That company turned around when Steve Jobs came back. So it wasn’t always a foregone conclusion that it would be a good investment. We don’t buy index funds per se, but we buy broad baskets of stocks that are similar to indices. And we do that because we think it’s hard to know what’s going to happen tomorrow. We can’t predict tomorrow’s news, so we don’t know what companies are going to flourish in the future. But if we know if we buy most or all of them, and we buy it cheaply, and we overweight profitable and small and valued companies, that historically it’s done very well, and we think there’s no reason to think it won’t in the future.

Influence on Long-Term Diversification Strategies

Madison: Yeah. All right. So how might Bessembinder’s findings influence the way long-term investors approach diversification?

Mike: I would hope that they take the right—I hope that they take the right information from his study. When 96%, or almost 96% of publicly traded companies don’t really have positive returns, those aren’t great odds. I hope that they take from that return not to think that they like some company where they’re going to load up on its stock. Hey, if you have an interest in something and it’s exciting for you, and you want to have like two or four or 5% of your holdings in that company, hey, that’s fine. But hopefully people take from this research that, you know, investing in the broad market is the way to be successful.

Role of Technology Stocks in Future Gains

Madison: Yep. All right, so given the findings, what role do you think technology stocks will play in driving future stock market gains?

Mike: It’s hard to say. I would think that in the near term, technology stocks have outperformed for 15 years. It’s really unusual for companies to outperform for a real long time to the extent that they have. Even if you look at Altria or Vulcan, there are periods where the stock really was dramatically great. But the last five years, the S&P is up almost 100%, and Altria’s up like 23%. So it’s hard to know in advance what will do best. I don’t know. Like I said, it would be unusual for technology stocks to keep leading the way. But I don’t know when that will change. Nobody else does either.

Conclusion

Madison: Yeah. You can’t predict the future.

Mike: Cannot.

Madison: Yep. All right, so for more information on Yardley Wealth Management or Yardley Estate Planning, you can visit our website at yardleywealth.net, and yardleyestate.net. You can also follow us on socials at Yardley Wealth Management. Don’t forget to smash the like button if you enjoyed this episode. This podcast has been produced by Madison Demora and Mike Garry with technical and artistic help from Poe Productions.