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Just 4% of stocks yielded 98% of the returns

(These are just rough, AI transcriptions, but should help if you need to read instead of listen)

Speaker 1 (00:00): 

Hi everyone. This is Tim Melvin. And we’re back once again to talk about a better way to wealth. And today I want to talk to you about a study that came out last year. It got a lot of attention in the press by an Arizona state professor by the name of Hendrick Besson binder. Now, Mr. Besson binder looked at the performance of the U S stock market from 1926, all the way up through the end of 2019. What he found was that if you had bought the entire market market back then and held on that entire time, you would have made yourself about $47 trillion. That’s how much wealth was created by the stock market in the United States, which is pretty exciting. But when you start to dig down into it, this gets really interesting. 4% of the stocks produced over half of the return. So I’m sorry.

Speaker 1 (00:53):

4% of the stocks produced 98% of the return 0.3, 1% of the stocks or 83 stocks produced about half of the return of the U S market over that time, most stocks, and there were 26,192 stocks. I believe that had traded during this very long period of time. About a thousand of them actually outperformed T-bills are about 4%. The rest of them underperformed T-bills and far more than half of us stocks over the longterm lost their shareholders’ money. It’s a remarkable study and it does show that being a great stock picker is really not as easy as some would tell you that it is. And the success of the index funds has been due to just a small handful of the actual holdings within the portfolio.

Speaker 2 (01:51):

You look at this and

Speaker 1 (01:51):

I looked at some of the great stocks and you say, well, why these should have been so obvious to everybody. Why didn’t you just pick the big winners what’s harder than you think. Cause once you think about a couple of things, let’s walk through a few of these apple was easily. One of the top performing stocks of the whole period, even though it’s only been around since about 1985, but in the apple guys in the early 1990s, people were dumping apple with both hands because they were show sure that Microsoft was just going to kill them in the personal computer market. And it sold off again, very heavy in the internet. Bust would have been really hard to hang on to that stock is it went from, you know, way up there, a hundred back down to about $8 a share at the time it was a devastating decline.

Speaker 1 (02:35):

Most people didn’t hold on through it. Microsoft is the other one that was so obvious that they dominated everything. Let me let you in on a secret about Microsoft. If you bought that in 2000 set on I’m sorry, in 1999, you didn’t break even until 2017, 18 years later, really tough to sit still with a stock for that long Amazon great company. It was on Forbes left for dead list back in 2003 after the internet crash. And it really looked like they were going to run out of cash and go out of business. At the time again, you don’t see Amazon or Google millionaires on every corner, although you should. It’s hard to hope stocks for that long, a period of time, even Amazon is greatest stock. As it’s been, has had four 90% draw downs during its trading history. That’s terrifying. It’s really hard to hold through all of that, you know, and then you look at Johnson and Johnson who can’t and Johnson and Johnson is a boring old drug company.

Speaker 1 (03:35):

They make Q-tips who cares? Well, if you held onto that stock for longterm, you’ve made lots of money. Now what really leaped out at me from this study was that while technology stocks did in fact produce the higher overall return, it was this tiny percentage of technology stocks that actually delivered the goods. There’s just very few that actually are on the list, but those that made it generated an enormous amount of wealth. Most of the wealth creation of the stock market was from stuff that we buy every day, gas sodas in the stores didn’t sell that stuff. Walmart of course, is on the list. Merck home Depot, you know, credit and debit cards drug companies, fast food telephones banks, cars stop that we use every day is what created all the wealth, not the super exciting stuff now buy and hold forever. I think the myth of that is really dispelled by this study.

Speaker 1 (04:36):

We really need to focus on buying great companies when they’re available at great prices and then selling them when they’re at inflated prices or the business starts to turn. You have to have a little bit of a different mindset than that classic buy and hold forever. Buy when the price is great sell when the price is too high, I think is a much better way of looking at this. Now are the same trends that drove the last a hundred years is going to drive the next hundred years. The answer is probably not except for, you know, food stocks, chloride, you know, those types of stocks are still going to be around, but most of their value is recognized. So what are going to be the Amazons and Googles of the next hundred years? I have no idea and I’m not going to live for another a hundred years.

Speaker 1 (05:20):

So I don’t really care, but I do have a pretty good idea of what’s going to drive great growth over the next, say 10 to 20 years while I very much expect to be around and kicking and kicking. I think you’re looking at renewable energy. I think natural gas is going to be a wonderful business over the next decade. The demand for broadband is going to keep going up. Water demand is going to become a huge issue and companies that can solve that issue, going to make their shareholders in enormous amount of money e-commerce will continue to be a huge and growing story. Big data analytics is going to be a massive business for the rest of my lifetime. Cyber security, more important than ever breakthroughs in geonomics are happening every day. It’s going to be huge. Now. Unfortunately, geopolitical con conflict is with us always.

Speaker 1 (06:08):

It’s one of the eternal growth industries. So what our approach is going to be our better way to wealth. We’re going to look for great businesses that benefit from some of these powerful trends of the next 10 to 20 years. We’re going to buy them when the market disrupts that particular industry or the general market. Well, we can get these businesses at great prices when the hype comes back into the industry and they sell it, very inflated prices. We remembering that only a handful of stocks that survives create massive wealth over a hundred year period of time. When these businesses get to inflated prices, we’ll take our profits and walk away now, but just keeps growing and never gets to an inflated price. Yeah, we’ll hold that forever. But those opportunities really are few and far between. So anyway, I’m Tim Melvin, and that’s, today’s better way to wealth. And I’ll talk to you guys tomorrow.