This Man Lost Everything Betting On Stocks

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The headline of this article is something you’ll very rarely, if ever, see in the financial press. You’re much more likely to hear something along the lines of:

“Joe Schmo made $1,000,000 buying Tesla stock”

“Jane Doe retired early buying Bitcoin”

“If you’d invested $1,000 in Microsoft in 1990….”tual

I will not parse words here. THESE ARE ALL HORRIBLE ARTICLES.

Most of this is survivorship bias that promotes an imprudent gambler’s mentality. Let me explain.

Back in 2015 there was a great study from Longboard called The Capitalism Distribution. They found, unsurprisingly, that roughly 80% of the markets entire gains came from 20% of all stocks from 1989-2015. 80% of stocks had a 0% gain.

JP Morgan came to similar conclusions in a research paper titled “The Agony and the Ecstasy – the Risks and Rewards of a Concentrated Stock Investing“. In a study ranging from 1980-2013 they found:

  • The median stock underperformed the market with an excess lifetime return of -54%. In other
    words, in most cases, a concentrated holder would have been better off invested in the market.
  • Two-thirds of all excess returns vs. the Russell 3000 were negative, and for 40% of all
    stocks, returns were negative in absolute terms.
  • Historically, there were some extreme winners: the right tail is ~7% of the universe and includes
    companies that generated lifetime excess returns more than two standard deviations over the mean.

That little blue block on the right hand tail is your Teslas and Microsofts. The thousands of other stocks are to the left. Meaning, 93% of everything else is not Tesla or Microsoft or whatever story stock you might read about in these articles. Said differently, betting your life’s savings on a single stock is more akin to betting it all on black. In fact, you have better odds of picking the right spin of the roulette wheel than you do picking the next Tesla (and actually holding onto it through the ups and downs and timing the entry/exit).

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William K. 4 weeks ago Member's comment

Some very good advice that I heard years ago also applies to stocks, and that advice was "Never gamble more than you can afford to lose." Although it should really be Never BET more. Certainly the truth appears to ultimately be that much of the broad gain in the market is due to the fed constantly causing inflation. Where would it be if inflation were not raising the price without increasing the value? That is a nasty question that usually drives a big change in the conversation topic, or else breaks up the crowd.