- The stock market has roared back…
- The keys to successful investing…
- The income secret that could literally MAKE your retirement…
Dear Reader,
Since 1985, the median stock has undergone:
A): A 47% drawdown
B): An 85% drawdown
C): A 62% upswing
D): A 113% upswing
Which do you believe is the answer?
You will have your answer soon. Let us first look into the subject of our inquiry — the stock market.
The Stock Market Takes the Elevator for Once
It is often stated that the stock market takes the stairs up… and the elevator down.
Yet in recent weeks the stock market has inverted the equation. It has abandoned the stairs for the elevator.
Through the Kobeissi Letter we learn that:
The S&P 500 has jumped over 20% across the past 41 trading sessions — its third-greatest spree this century.
Across the identical space, the Nasdaq 100 has leapt over 27%. That is its third-greatest leap since 2002.
Only 2020 and 2008 — I am informed — witnessed such drastic turnabouts across the past 20 years.
Thus the S&P 500 and the Nasdaq 100 presently trade within 2.1% and 1.8% of their record heights.
What’s Going on? And Can It Last?
Why are Wall Street’s animal spirits once again soaring?
The explanations widely on offer include:
Relaxing trade tensions… splendid corporate earnings… beneath-expectation inflation… and anticipation of Federal Reserve interest rate reductions.
I hazard there is adequate justice in this accounting. Additional factors may be considered yet they do not merit pursuit.
How long will the business sustain? I do not know.
Yet where others perceive containers half-full of liquid, I perceive containers half-empty of liquid.
Where others perceive silver edgings, I perceive solid gray.
And so I suspect the present joys will subside soon enough… as all joys do.
The Answer
Let us now return to today’s question:
Since 1985, the median stock has undergone:
A): A 47% drawdown
B): An 85% drawdown
C): A 62% upswing
D): A 113% upswing
Have you chosen your answer?
Here is the correct answer:
B — Since 1985, the median stock has endured an 85% drawdown.
I’ve Fallen and I Can’t Get up
Messieurs Michael Mauboussin and Daniel Callahan of Counterpoint Global have ransacked the data.
They took under observation 6,588 United States stocks stretching to 1985.
And their researches revealed that the median stock has endured the 85% lacing.
What is more, the median stock never fully regains the vertical after taking the 85% knockdown.
Thus if you purchase the median stock at its summit, you will never emerge with a whole skin.
Note these gentlemen cite the “median” stock — not the average stock.
That is because the average incorporates such outsized behemoths as Apple, Amazon and Nvidia.
Thus they throw the scales out of balance.
Imagine a population of two distinct types. The one batch stands two feet in height, the other batch 12 feet in height.
The average height equals six feet. Yet not one person stands six feet.
Now you have the flavor of it.
Even the Mightiest Stocks Have Taken the Fall
Even phoenixes Apple, Amazon and Nvidia have withstood plummets of 83%, 95% and 90% — before ascending from ashes.
In all, the study reports that:
- All stocks have drawdowns, and 28% of stocks since 1985 have fallen at least 95% from peak to trough…
- Of these 28% of stocks that fell at least 95%, the median recovered only 16%, but around a sixth of them completely regained their peak value.
- For those that did recover, the whole round trip took on average almost fifteen years.
15 years is a mighty lengthy round trip.
What of mutual funds? Is there not safety in numbers? The answer is not particularly.
Of some 1,000 United States equity mutual funds — since 2000 — even the top 20 withstood an average 60% drawdown.
And the most superior of these funds endured a 68% trouncing at some point.
The Majority of Stocks Underperform T-Bills
Meantime, Arizona State finance professor Hendrik Bessembinder examined some 28,600 United States stocks, 1926-2024.
He discovered that the majority of them underperformed United States Treasury bills:
- When you compounded the returns for stocks over the full time that they were included in the database, that only about 43%, or roughly three out of seven stocks, turned in better performance than Treasury bills over the same period of time that the stock was listed. So, about 57% failed to beat Treasuries…
- When I looked at the distribution of compound returns, the most frequent outcome was a negative 100% return. So, the fact is there are a lot of stocks that go belly up.
The professor discovered further that a mere spoonful of stocks yielded the vast bulk of stock market wealth.
In summary of Professor Bessembinder’s findings, Arizona State University’s W. P. Carey School of Business writes:
- “The results… help to explain why active strategies, which tend to be poorly diversified, most often underperform,” says Bessembinder, who found that the largest returns come from very few stocks overall — just 86 stocks have accounted for $16 trillion in wealth creation, half of the stock market total, over the past 90 years. 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.
96% of stocks matched one-month T-bills! How do you like it?
The Keys to Successful Investing
What type of stock is likelier to yield success, Professor Bessembinder?
Growth stocks that deliver high fundamental growth. These are stocks with high asset growth, high sales growth, high cash growth, and most important of all, high net income growth.
The research is chock-a-block with caveats, ifs and buts. Yet the general conclusion is clear as gin:
Select your stocks wisely. And even when you do select wisely?
You must possess Job’s patience.
You must hold tight through drubbings that would try even the stoutest heart.
That is, you must do what most investors do not.
Can you?
Brian Maher
for Freedom Financial News
