Does Stock Picking Work?
It is extraordinarily difficult to beat an overall market index fund by selecting individual stocks.
Hendrick Bessembinder (Arizona State) published a study in November 2017 that looked at stock market returns going back to 1926. Here were the key findings:
- The best performing 4% of companies explain the net gain for the entire U.S. Stock market between 1926 and 2016.
- More than 50% of all stocks have delivered negative lifetime returns.
- The most frequent outcome for individual stocks over their full lifetime is a loss of 100%.
- The overwhelming majority of individual stocks did not outperform a one month U.S. Treasury bond during the years between 1926 and 2016. In other words, many investors took on the risk of the stock market and achieved returns less than what is generally considered to be a risk-free investment.
While it is certainly not impossible to beat the overall market by selecting individual stocks, the data suggests it is an extremely low probability. While it is tempting to believe you (or a financial advisor) can pick the big winners, the notion is simply contradicted by the research and data available.
The data is from the common stocks listed in the CRSP Database. A link to the full study is here.