Lesson 7 of 7 · 3 min · Stocks

The needle and the haystack

Most stocks lose. A handful carry the whole market.

Pencil drawing of a haystack with a circle around a single green needle.
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  1. Since 1926, a small group of American companies created almost all of the gains of the whole US stock market.

  2. The finance professor Hendrik Bessembinder followed about 26,000 US stocks. More than half did worse over their lifetime than plain one month Treasury bills.

  3. The best 4% of companies account for all of the net wealth the market created. The other 96%, taken together, roughly matched Treasury bills.

  4. So if you own just a few stocks, the most likely result is that you miss the few big winners, and trail the market.

  5. Owning the whole market is the only way to be sure you hold the needles. That is the quiet case for broad index funds.

Quick question

You pick five random US stocks and hold them for decades. Compared with owning the whole market, what is most likely?

  • You beat the market
  • You trail the market
  • You end up about the same
Show the answer

You trail the market

A few giant winners pull the average up. A small handful usually holds none of them, so it tends to land below the average.

Keep this one

Few needles. Own the haystack.

Where this comes from

Hendrik Bessembinder, “Do Stocks Outperform Treasury Bills?”, Journal of Financial Economics, 2018. US common stocks from 1926 to 2016.