{"id":274876,"date":"2025-10-03T15:32:12","date_gmt":"2025-10-03T15:32:12","guid":{"rendered":"https:\/\/www.europesays.com\/us\/274876\/"},"modified":"2025-10-03T15:32:12","modified_gmt":"2025-10-03T15:32:12","slug":"picking-a-market-beating-stock-is-far-from-a-coin-flip-%f0%9f%aa%99","status":"publish","type":"post","link":"https:\/\/www.europesays.com\/us\/274876\/","title":{"rendered":"Picking a market-beating stock is far from a coin flip \ud83e\ude99"},"content":{"rendered":"

Picking stocks in an attempt to beat the market averages is a challenging and often money-losing endeavor<\/a>. In fact, most professional stock pickers aren\u2019t able to beat<\/a> their benchmarks consistently<\/a>.<\/p>\n

One reason for this is that few stocks actually deliver above-average returns.<\/p>\n

According to S&P Dow Jones Indices<\/a>, only 19% of S&P 500 index constituents outperformed the average stock\u2019s return from the beginning of 2001 through Sept. 2025<\/strong>.<\/p>\n

Just 44% of S&P 500 constituents outperformed the index in the first half of 2025. Only 28% outperformed in 2024. Most S&P stocks underperformed the index in 13 of the past 24 calendar years.<\/p>\n

In other words, the odds of picking market-beating stocks have historically been worse than a coin flip.<\/p>\n

If you beat the odds and successfully pick a market-beating stock, you could crush the market average. That\u2019s because returns are positively skewed, and they have a very long right tail. When you invest in a stock, you can only lose 100% (the left tail), but your upside (the right tail) is theoretically unlimited.<\/p>\n

This speaks to TKer Stock Market Truth No. 4: Stocks offer asymmetric upside<\/a>.<\/p>\n

\u201cA long-standing challenge that active managers face is the positively skewed nature of equity returns, with an average return greater than that of the median,\u201d wrote<\/a> Anu Ganti, S&P Dow Jones\u2019 Head of U.S. Index Investment Strategy.<\/p>\n

\"\"<\/a>Stock market returns are positively skewed, which explains why the average return is considerably greater than the median return. (Source: S&P Dow Jones Indices<\/a>)<\/p>\n

\u201cThe median return was 59%, far less than the arithmetic average of 452%,\u201d Ganti observed after reviewing the data since 2001.<\/p>\n

So while half of the S&P 500 constituents generated a return of 59% or less, the minority of stocks generating extraordinary returns lifted the average all the way to 452%.<\/p>\n

The chart below explores this story from the perspective of each year\u2019s performance. As the red dots show, the average return has been greater than the median return in 20 out of the past 24 years.<\/p>\n

\"\"<\/a>The average return exceeded the median return in 20 out of the past 24 years. (Source: S&P Dow Jones Indices<\/a>)<\/p>\n

\u201cWhen fewer stocks outperform, active management is harder,\u201d Ganti said. \u201cThis is especially relevant for more concentrated portfolios that may be less likely to hold one of the relatively small number of outperforming stocks.\u201d<\/p>\n

This echoes something Warren Buffett said in his 2023 annual letter.<\/p>\n

Buffett, CEO of Berkshire Hathaway, is often praised as history\u2019s greatest investor. His legendary knack for picking stocks for Berkshire\u2019s equity portfolio helps explain why the company\u2019s shares have massively outperformed the S&P 500 over the years.<\/p>\n

However, returns have not been evenly distributed across Berkshire\u2019s stock holdings.<\/p>\n

\u201cOver the years, I have made many mistakes,\u201d Buffett explained<\/a> in his annual letter published in 2023 (emphasis added). \u201cOur satisfactory results have been the product of about a dozen truly good decisions \u2014 that would be about one every five years<\/strong>.\u201c<\/p>\n

At the time, he walked through examples, including Coca-Cola and American Express, which multiplied in value many times over while returning massive cash dividends. Read more about it here<\/a>.<\/p>\n

\u201cThe lesson for investors: The weeds wither away in significance as the flowers bloom,\u201d Buffett said<\/a>. \u201cOver time, it takes just a few winners to work wonders.\u201d<\/p>\n

\"\"<\/a>Warren Buffett speaks at Berkshire Hathaway\u2019s 2023 annual shareholder meeting. (Source: YouTube via TKer<\/a>)<\/p>\n

The definitive work on how just a few stocks generate the bulk of the market\u2019s return comes from Arizona State University professor Hendrik Bessembinder.<\/p>\n

In 2017, Bessembinder made waves with his research paper<\/a> that observed most stocks had been pretty crummy investments that underperform Treasury bills. (Read the news coverage here<\/a>, here<\/a>, and here<\/a>.)<\/p>\n

In another paper<\/a>, Bessembinder found that \u201cthe top-performing 2.4% of firms account for all of the $US 75.7 trillion in net global stock market wealth creation from 1990 to December 2020.\u201c<\/p>\n

\u201cThis exceedingly small number shows how difficult it is for a company and its successive management teams to maintain high returns on capital and competitive advantage over the long term,\u201d Nicholas Colas, co-founder of DataTrek Research, wrote in a September 5 note.<\/p>\n

This difficulty in identifying market-beating stocks is why many experts \u2014 including Buffett<\/a> \u2014 recommend that most investors allocate the bulk of their equity holdings to S&P 500 index funds, where you\u2019re likely to get exposure to these mega outperformers.<\/p>\n

\u201cThe whole point of stock markets is to allocate capital to its best possible uses, and the companies at the top of that heap are few and far between,\u201d Colas said. \u201cA stock index like the S&P 500 is not a great long-term investment because most stocks \u2018work,\u2019 but rather because a handful of companies reshape the world in their image.\u201d<\/p>\n

To be clear: There\u2019s nothing wrong with investing in specific businesses you believe in or stocks you think offer some extraordinary value.<\/p>\n

However, if your intention is to beat the market, you should manage your expectations.<\/p>\n

–<\/p>\n

Related from TKer:<\/p>\n","protected":false},"excerpt":{"rendered":"Picking stocks in an attempt to beat the market averages is a challenging and often money-losing endeavor. In…\n","protected":false},"author":3,"featured_media":274877,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[13],"tags":[64,135,67,132,68],"class_list":{"0":"post-274876","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-markets","8":"tag-business","9":"tag-markets","10":"tag-united-states","11":"tag-unitedstates","12":"tag-us"},"share_on_mastodon":{"url":"https:\/\/pubeurope.com\/@us\/115310962308493445","error":""},"_links":{"self":[{"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/posts\/274876","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/comments?post=274876"}],"version-history":[{"count":0,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/posts\/274876\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/media\/274877"}],"wp:attachment":[{"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/media?parent=274876"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/categories?post=274876"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/tags?post=274876"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}