Do Stocks Outperform Treasury Bills? - Bessembinder's Report

Bessembinder gives us his answer to the question ‘Do stocks outperform treasury bills?’ immediately in the abstract of his paper:

Most common stocks do not.  Slightly more than four out of every seven common stocks that have appeared in the CRSP database since 1926 have lifetime buy-and-hold returns, inclusive of reinvested dividends, less than those on one-month Treasuries.  When stated in terms of lifetime dollar wealth creation, the entire gain in the U.S. stock market since 1926 is attributable to the best-performing four percent of listed companies.

There is an easy way to apply these findings to your portfolio, assuming they are accurate and the results hold true over the next four or five decades.  Anyone who has several decades ahead of them and a goal of creation of wealth through common stocks can just buy shares in an index fund of all U.S. domiciled companies and reinvest the dividends.  This will ensure the owning of the four percent of common stocks that produce all the returns.

In today’s world, it seems that people are jumping wholeheartedly into this approach by buying an index fund and holding on. The largest investors, public pension plans and large endowments, have the time for this, as their timeframe is forever. They are some of the biggest buyers of broad market index funds. However, they have a serious problem, as these plans have a mandatory need for cash flow. By spending the dividends to fund their cash flow needs, they lose the compounding impact of reinvestment that adds substantially to the outcome.

Just as with these large investors, most individuals at some point in their lives need cash flow from their savings. It is normally after retirement when cash is needed the most.  Because the real benefits of holding all stocks are derived from reinvesting and time, age and cash flow needs to minimize, if not entirely eliminate, the proposed benefits of this approach.

Although the bulk of Bessembinder’s report shows that the record of common stock performance measured one by one is pretty dismal, it does offer hope regarding active stock selection. This hope for those who pursue individual stock selection is saved for the final two sentences of the study. They are worth repeating:

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Disclosure: Anderson Griggs & Company, Inc., doing business as Anderson Griggs Investments, is a registered investment adviser.  Anderson Griggs only conducts business in states and ...

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