at the very least, folks should have some kind of ripcord. As Walter Deemer says, no company has ever gone bankrupt with its stock trending positively.
As an aside note, from what I have heard, lots of wealth management clients have been overweight bonds in the past years, as regulations in many countries categorize them as "low risk". And since gold is considered "speculative", they are underweight that diversifier. One can anticipate a good degree of unhappiness in client meetings in Q1 of next year.
That chart - looks odd that telcos are a great bet and utilities are low growth and risky. Would have thought the reverse is true. Any chance that something is mislabelled ??
These are concepts that should be taught in school. From my point of view, it all follows a natural logic. Individual stocks are comparable to individuals trying to adapt in an extremely competitive environment where 'one in a thousand makes it.' Of those that succeed, they all must go through the inevitable cycle of life: birth, growth, and death. So why does the S&P 500 continue its undisturbed raising, despite the ups and downs? Because it represents the Species. The species survives because it is composed of those same individuals who survive and perpetuate their own DNA, favoring the most useful mutations in terms of adaptation. Indices are designed to select winning stocks based on their characteristics. So, if a publicly traded company is inevitably destined to fail sooner or later, there will be a new one ready to take its place, leveraging a competitive advantage in emerging sectors that offer more opportunities. Here's a visual depiction:
-A chart showing the evolution of the weight of different sectors in reference indices, from the early 1900s until COVID.
-A chart with every company in and out of the Dow since 1928 until COVID.
first of all thank you for bringing these pieces of research-based insights up frequently. It must be quite some work to dig through that underlying material, and from time to time you really unwrap a gem.
I just wanted to make a note here, as I think there is a part that may be easily misunderstood by the reader without reading it up in the source.
You mention that "some 55% of all stocks have negative returns over a ten-year period" and post that above the picture witht he different industries. I think you generated that picture based on the table II from the report (the picture itself is not part of the paper).
The author describes this as: "Table II shows the median ten-year returns on individual stocks in the selected universe **relative to the cap-weighted market portfolio**, broken down by industry group"
As per my understanding, "negative returns" is different from "having a return that is worse than the market". So what is the difference?
If you had invested in e.g. Mc Donalds for the last 5 years, you would not have earned as much as the market (S&P 500 did 55.7 % for the simplicity of this example), but you would still be up 43.5 % and cashed nice dividends along the way. So not exactly "negative returns" - yet in the study, this would show up in the "negative returns" category.
I do understand, that the investor would have likely been better off if he had bought a low-cost index-fund, but still the situation is not as dire as it may be interpreted from the high quantity of "negative returns".
Methodical hint.
Unfortunately, the paper doesn't even state whether or not dividends are included (I picked an example that would likely have only a slightly higher average dividend yield than the S&P), but I would just assume that they must have included them as it would be a pretty incomplete study otherwise.
You can pick any random stock with a positive return that is smaller than the market to make that point. It is not about MC Donalds, it is about the choice of words in the article.
I think it is important to consider the difference between absolute negative returns and negative returns in comparison to the market, which can be a huge difference.
If you’re rich enough, you don’t even have to sell your 40% stock exposure. Private banks will happily lend against that or write a swap so you can diversify your portfolio without triggering capital gains.
I know, but the problem with that is that it goes horribly wrong at the worst possible time. I have seen banks giving margin calls on entrepreneurs when they couldn't sell their shares and their firm was in distress. It is playing with fire if you take out a loan against a concentrated stock position.
at the very least, folks should have some kind of ripcord. As Walter Deemer says, no company has ever gone bankrupt with its stock trending positively.
As an aside note, from what I have heard, lots of wealth management clients have been overweight bonds in the past years, as regulations in many countries categorize them as "low risk". And since gold is considered "speculative", they are underweight that diversifier. One can anticipate a good degree of unhappiness in client meetings in Q1 of next year.
Interesting read (as ever!)
That chart - looks odd that telcos are a great bet and utilities are low growth and risky. Would have thought the reverse is true. Any chance that something is mislabelled ??
No idea. I can't check that.
These are concepts that should be taught in school. From my point of view, it all follows a natural logic. Individual stocks are comparable to individuals trying to adapt in an extremely competitive environment where 'one in a thousand makes it.' Of those that succeed, they all must go through the inevitable cycle of life: birth, growth, and death. So why does the S&P 500 continue its undisturbed raising, despite the ups and downs? Because it represents the Species. The species survives because it is composed of those same individuals who survive and perpetuate their own DNA, favoring the most useful mutations in terms of adaptation. Indices are designed to select winning stocks based on their characteristics. So, if a publicly traded company is inevitably destined to fail sooner or later, there will be a new one ready to take its place, leveraging a competitive advantage in emerging sectors that offer more opportunities. Here's a visual depiction:
-A chart showing the evolution of the weight of different sectors in reference indices, from the early 1900s until COVID.
-A chart with every company in and out of the Dow since 1928 until COVID.
https://www.visualcapitalist.com/200-years-u-s-stock-market-sectors/
https://www.visualcapitalist.com/every-company-in-and-out-of-the-dow-jones-industrial-average-since-1928/
Hello,
first of all thank you for bringing these pieces of research-based insights up frequently. It must be quite some work to dig through that underlying material, and from time to time you really unwrap a gem.
I just wanted to make a note here, as I think there is a part that may be easily misunderstood by the reader without reading it up in the source.
You mention that "some 55% of all stocks have negative returns over a ten-year period" and post that above the picture witht he different industries. I think you generated that picture based on the table II from the report (the picture itself is not part of the paper).
The author describes this as: "Table II shows the median ten-year returns on individual stocks in the selected universe **relative to the cap-weighted market portfolio**, broken down by industry group"
As per my understanding, "negative returns" is different from "having a return that is worse than the market". So what is the difference?
If you had invested in e.g. Mc Donalds for the last 5 years, you would not have earned as much as the market (S&P 500 did 55.7 % for the simplicity of this example), but you would still be up 43.5 % and cashed nice dividends along the way. So not exactly "negative returns" - yet in the study, this would show up in the "negative returns" category.
I do understand, that the investor would have likely been better off if he had bought a low-cost index-fund, but still the situation is not as dire as it may be interpreted from the high quantity of "negative returns".
Methodical hint.
Unfortunately, the paper doesn't even state whether or not dividends are included (I picked an example that would likely have only a slightly higher average dividend yield than the S&P), but I would just assume that they must have included them as it would be a pretty incomplete study otherwise.
Can Mc Donald be the exception that proves the rule? Anyway it is an average of 10 years considering every single stock in the sector
You can pick any random stock with a positive return that is smaller than the market to make that point. It is not about MC Donalds, it is about the choice of words in the article.
I think it is important to consider the difference between absolute negative returns and negative returns in comparison to the market, which can be a huge difference.
I understand your point
Here are two papers that may better clarify the topic:
https://investingmastery.net/wp-content/uploads/2023/01/SSRN-id2900447.pdf
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4104756
If you’re rich enough, you don’t even have to sell your 40% stock exposure. Private banks will happily lend against that or write a swap so you can diversify your portfolio without triggering capital gains.
I know, but the problem with that is that it goes horribly wrong at the worst possible time. I have seen banks giving margin calls on entrepreneurs when they couldn't sell their shares and their firm was in distress. It is playing with fire if you take out a loan against a concentrated stock position.