The Long View
Hendrik Bessembinder: ‘Do Stocks Outperform Treasury Bills?’
Sep 10, 2024
Hendrik Bessembinder, a market design expert and professor at Arizona State University, dives into the intriguing question of whether stocks truly outperform Treasury bills. He discusses his research revealing that 57% of stocks have historically underperformed, emphasizing the role of dividends and market capitalization. The conversation also tackles the active versus passive investment debate, showcasing the complexities of stock return distributions and the need for diverse strategies. Bessembinder’s insights challenge conventional stock picking and highlight the importance of adapting to market changes.
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Quick takeaways
- A significant portion of stocks, around 57%, fail to outperform Treasury bills, highlighting the risks of stock market investing.
- Certain fundamental characteristics, such as high growth metrics, are linked to better long-term stock performance but predicting winners remains challenging.
Deep dives
The Nature of Stock Performance
Most stocks have failed to outperform Treasury bills over their investment lifetimes, as only about 43% of stocks in a study spanning from 1926 to 2016 succeeded in generating returns above cash. In practical terms, this translates to approximately 11,000 of over 25,000 stocks analyzed outperforming Treasury bills, while about 57% did not achieve this benchmark. The study highlights a counterintuitive reality where, despite the average stock return exceeding cash or bonds, many individual stocks actually underperform. This phenomenon arises from a statistical concept known as positive skewness in returns, indicating that while the average might be high, most individual stock outcomes fall below this average.
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