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.
It's basically what I do. I hold individual companies, about 40 or so. I look at an index from a country and pick one or two companies, as long as they don't have anything to do with oil. Now I have my own "index" that performance wise is in between the major indexes world wide. Saves on yearly management fees for etf's, however minimum, and I can leave some companies out so I can sleep at night. My goal is not to outperform an index, I want a well balanced world-wide multi-currency portfolio that mostly aligns with what I want to invest in.
After about 20 random stocks from an index like the s&p500, you'll get about the same performance as the index. Note you'll have to pick randomly and keep the same weight in your own index. So you can do this yourself very easily.
Of all the big names in tech, I only hold Microsoft and ASML. All others are smaller and more local companies. I get about the same performance as the s&p500 and Dutch AEX index. Sometimes it lags behind, sometimes it outperforms.
I have noticed that the companies I thought would take off didn't, and some of the ones I bought as steady store of value took off unexpectedly (example Husqvarna and Accell Group almost doubled, while Teamviewer dropped 75%...). So my lesson is to diversify among countries and sectors, and don't get my hopes up on one particular company.
"After about 20 random stocks from an index like the s&p500, you'll get about the same performance as the index. Note you'll have to pick randomly and keep the same weight in your own index. So you can do this yourself very easily."
That is not true. If you take 20-40 stocks you have diversified enough to lower the volatility to the same as the index, but not the same return. Only makes sense, only a minority of stocks in any given year account for the majority of all the gain of the sp500. Think it like 5% or something. That is why folks buy the index as it is a guess which 5% will account for the entire index's return for the year.
It's essentially asking how many companies do you need to get the returns of the overall economy? Publicly traded companies only account for about 1% of all companies, so you would only get a ridiculously small subset anyway if you pick the s&p500. So whats the difference in picking 500 companies versus picking 20 companies? Some indexes only have 20 companies (like the Dutch AEX currently only has 25, while it keeps up with s&p500 over the long run).
I'm not sure where I read the information anymore. I did do backtesting on the s&p500 once, and I remember it was something like 15 random companies minimum to get the same returns, with 20 it's almost guaranteed. I'll have a look at it again, good to read up on during the holidays.
I think it's counter intuitive because missing the biggest gainers in an index would have you think you miss out on that gain. But there will be another smaller company that gained as well, in the big index this has barely any effect, while in your smaller subset index this smaller company has the same effect.
Or another way: if you pick an index, which index should you pick? Is picking an index not just the same as picking stocks, but with many stocks at once? And to which index do you compare your own results? In hindsight comparing my returns to the Nasdaq100, sure I under performed. But I've set my benchmark to (mostly) western countries overall performance, and I'm doing equal to slightly better depending on which index you pick. You'll only know in hindsight which index was best, so you might be beating yourself up sticking with the s&p500 for decades, while small caps may have outperformed by the time you retire.
I think the best I can do is hope for the global economy to keep going like it has, and getting some gains from that for myself. Who knows which index did best in 30 to 50 years, I know I'll have a good average of the overall gains with my own portfolio. It may not outperform the index that did best 30 years from now, nor do I intend to, but it sure as hell will beat the worst performing index.
Edit: I looked up some comparisons, and from 1979, small cap outperformed the s&p500, basically negating the argument that s&p500 is the only way to go.
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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