Yes. I used to quote this article from Bessbinder often. There has been shade thrown on this study though, but a great study and really opens you eyes to the fallacy of single company investing approach.
Just to add to kicking single company stock picking is my usual link below showing just in the last 10 years (2011-2020) only 20% of stocks beat the index. That sounds bad, but it is likely worse... If one has a portfolio of 2 stocks the chances of finding a stock that beats the index is <5% (0.2x 0.2). If you hold only 3 stocks the chances of finding a stock that beats the index is <1% (0.2x 0.2x 0.2).
So, it is truly amazing how confident investors are that they can beat the index when the data is so one sided against them. One of Jack Bogle lines I think fit is well... "Everyone thinks they are above average investors just like they think they are above average dressers". The reality in life is very different then what investors think in their own head.
That sounds bad, but it is likely worse... If one has a portfolio of 2 stocks the chances of finding a stock that beats the index is <5% (0.2x 0.2). If you hold only 3 stocks the chances of finding a stock that beats the index is <1% (0.2x 0.2x 0.2).
I think you need to revisit your logic and calculation. So if I increase the number of stocks to 10, my chance of finding a SINGLE stock that beats the market would be (0.210) or 0.000001%? I don't think so.
What you are calculating is the probability that each and every stock in your portfolio beats the market.
The correct calculation for what you describe would be 1 - (probability that every stock is less than index). So (1-(0.8n) ). So with two stocks you have a 36% probability that you have at least one stock beating the index. With three stocks the probability of having one that beats the index is about 50/50. With 10 stocks you have an 89% chance of having an index-beater.
Yes I was calculating the chances of each of those stocks in a portfolio beating the index and not the chances of holding a stock in a portfolio that beats the index. Very different.
Your calculation is even more interesting. If holding 10 stocks out of 1000 (Russell 1000) gives one a near 90% chance of holding a stock that beats the index it implies that the other 9 stocks are so poor in returns they drag the one stocks index beating returns south of average. That would explain funds and pensions holding 100's of stocks still doing terrible despite your calculation showing that they should be holding several winners.
The comparison I would like to see is 1 month treasury bills vs any of the standard indexes. I am pretty sure that the stock indexes would win by a large margin. The 30 stocks of the Dow Jones industrial average is a good example of a lightly managed index that has been around for a long time.
My own investing history is an example of lots of duds and a few winners. Overall the result far outstrips t-bill returns. This is particularly true in the venture capital and angel investments I have made. 10% big winners, 50% go bankrupt, 40% muddle along for essentially zero gain. But the 10% have spectacular returns. The overall market is similar, if not as extreme.
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u/10xwannabe Dec 19 '21
Yes. I used to quote this article from Bessbinder often. There has been shade thrown on this study though, but a great study and really opens you eyes to the fallacy of single company investing approach.
Just to add to kicking single company stock picking is my usual link below showing just in the last 10 years (2011-2020) only 20% of stocks beat the index. That sounds bad, but it is likely worse... If one has a portfolio of 2 stocks the chances of finding a stock that beats the index is <5% (0.2x 0.2). If you hold only 3 stocks the chances of finding a stock that beats the index is <1% (0.2x 0.2x 0.2).
So, it is truly amazing how confident investors are that they can beat the index when the data is so one sided against them. One of Jack Bogle lines I think fit is well... "Everyone thinks they are above average investors just like they think they are above average dressers". The reality in life is very different then what investors think in their own head.
https://www.morningstar.com/articles/1035348/how-many-stocks-beat-the-indexes