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Comment by throw0101d

4 hours ago

Historically stocks that had a good run then tended to underperform:

> […] Since 1926, the median ten-year return on individual U.S. stocks relative to the broad equity market is –7.9%, underperforming by 0.82% per year. For stocks that have been among the top 20% performers over the previous five years, the median ten-year market-adjusted return falls to –17.8%, underperforming by 1.94% per year. Since the end of World War II, the median ten-year market-adjusted return of recent winners has been negative for 93% of the time. The case for diversifying concentrated positions in individual stocks, particularly in recent market winners, is even stronger than most investors realize.

* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4541122

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throw0101d

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dheera  3 hours ago

> Historically stocks that had a good run then tended to underperform

This is more of a mathematical axiom than a financial effect, because you're defining "underperform/overperform" with respect to an average that contains them.

  • gruez  1 hour ago

    >> Historically stocks that had a good run then tended to underperform

    >because you're defining "underperform/overperform" with respect to an average that contains them.

    Why is this true? For instance, if you're comparing the GDP growth of countries in the G7, why is it that one country (eg. US) can't consistently overperform year after year?

    https://ourworldindata.org/grapher/gdp-per-capita-worldbank?...

    Or if you want make it even more clear, you can construct a index consisting of two countries: a normal country (eg. US) and a basketcase (eg. DRC):

    https://ourworldindata.org/grapher/gdp-per-capita-worldbank?...

    • antoinealb  34 minutes ago

      Shouldn't you look at the YoY change instead, to compare to stock returns ? Otherwise that's like comparing market cap, and then it is obvious that a big company tends to stay big.

      1 reply →

  • throw0101d  13 minutes ago

    > This is more of a mathematical axiom than a financial effect, because you're defining "underperform/overperform" with respect to an average that contains them.

    Most stocks suck:

    > We study long-run shareholder outcomes for over 64,000 global common stocks during the January 1990 to December 2020 period. We document that the majority, 55.2% of U.S. stocks and 57.4% of non-U.S. stocks, underperform one-month U.S. Treasury bills in terms of compound returns over the full sample. Focusing on aggregate shareholder outcomes, we find that the 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. Outside the US, 1.41% of firms account for the $US 30.7 trillion in net wealth creation.

    * https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3710251

    > Four out of every seven common stocks that have appeared in the CRSP database since 1926 have lifetime buy-and-hold returns less than one-month Treasuries. When stated in terms of lifetime dollar wealth creation, the best-performing four percent of listed companies explain the net gain for the entire U.S. stock market since 1926, as other stocks collectively matched Treasury bills. These results highlight the important role of positive skewness in the distribution of individual stock returns, attributable both to skewness in monthly returns and to the effects of compounding. The results help to explain why poorly-diversified active strategies most often underperform market averages.

    * https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2900447

    And this certainly can have a financial effect on your finances: having the "wrong" stocks in your portfolio (i.e., most of them) and not have the "correct" ones will mean a (e.g.) comfortable retirement or not.

M3L0NM4N  3 hours ago

I mean these stocks have been performers for decades. If you posted this 10 years ago you'd look really wrong.

  • throw0101d  30 minutes ago

    > I mean these stocks have been performers for decades. If you posted this 10 years ago you'd look really wrong.

    And Japan performed ridiculously well for over decades and then stagnated for decades after that, but it averaged out between the two periods:

    > Ben Carlson: It's just a really long mean reversion. You got like 22% per year from 1970 to 1989 in Japan. Small caps in Japan did 30% per year for two decades.

    > It's insane. The returns almost had to be poor after that. If you put them together, the boom with the bust, it's like almost 9% per year.

    > It's kind of crazy. Over 50 years, the long-term worked. It's just that over that 20 or 30-year period, it didn't work so well.

    * https://rationalreminder.ca/podcast/412 (~4m20s)

    Annualized 9% per year is pretty good: the S&P 500 has average 10% since 1957 (70 years). Is there anything preventing US equities from doing the same thing: great performance from 2010 until now, and then 10+ years of stagnation starting (theoretically) tomorrow. If you look at 2000s S&P 500 you got zero returns, and the only thing that would have saved a US domestic (only) investor was having a bond allocation:

    * https://www.forbes.com/sites/advisor/2010/09/13/its-not-real...

    This is why diversification is important. People talk about "US stocks" doing well, but have US industrials done better than non-US industrials? US finances or energy done better than non-US? Or are "US stocks" doing better simply because tech stocks specifically have done better? Perhaps a US allocation is really a tech sector play:

    * https://ofdollarsanddata.com/should-your-portfolio-be-100-us...

  • Lerc  3 hours ago

    Yes, but when their run ends they tend to underperform.

    Every time.