The Biggest Winners in the Stock Market: Insights from Bessimbinder’s Research (2024)

Have you ever wondered why only a small fraction of stocks seem to drive the majority of market gains? Hendrik Bessimbinder's groundbreaking research offers eye-opening insights that could transform your investment strategy. By diving into his findings, you’ll discover the importance of diversification, the power of compounding, and why index funds often outperform individual stock picks. Read on to uncover the secrets behind the biggest winners in the stock market and how you can apply these lessons to your financial plan with Pinnacle Wealth Advisory (PNWA) and Doug Greenberg, Certified Investment Management Analyst (CIMA), President of PNWA.

The Power Law of the Stock Market

Hendrik Bessimbinder's research reveals that four out of every seven U.S. stocks have underperformed cash (one-month T-bills) since 1926. Even more astonishing, just 4% of companies have accounted for all the wealth gains in the entire stock market over that time. This statistic underscores a critical principle in investing: the stock market operates on power laws over the long run.

Diversification is Key

1. Capturing Big Winners: While individual stocks may perform well over short periods, Bessimbinder’s research highlights the importance of diversification. By diversifying your investments, you increase your chances of capturing the big winners that drive market gains.

2. The Average vs. Median Returns: The average cumulative return since 1926 is a staggering 23,000%, while the median stock return is -7.4%. This massive spread indicates that while most stocks underperform, a few stellar performers drive overall market gains. Understanding this disparity can help you make more informed decisions about your financial plan.

3. Positive Skew in Returns: The stock market’s positive skew means the best-performing stocks achieve outsized returns compared to the rest of the market. This highlights the importance of holding a broad range of stocks to benefit from these significant gains.

Time in the Market

Compounding over decades is like magic. There are no stocks with 20-30% annual returns over 8-9 decades. From 1926-2023, the S&P 500 was up 10.3% per year. While the best-performing survivors did not crush the market by leaps and bounds, their above-average returns compounded over 98 years led to incredible growth.

Noteworthy Data Points

Bessimbinder’s research includes several key data points that illustrate the stock market’s dynamics:

1. Mega-Winners: Seventeen stocks had cumulative returns of more than 5 million percent. However, the annual returns of these mega-winners averaged 13.5% annualized, demonstrating the power of long-term investment.

2. Top Performers: Altria was the best-performing stock over the entire period, with annual returns of 16.3% from 1926 to 2023. Nvidia achieved the highest annualized return of any stock with at least 20 years of data, boasting 33.4% per year.

3. Survival Rate: Only 38 stocks survived the entire 98-year period studied. The list of biggest winners includes some surprises but mostly features blue-chip names, illustrating how these companies earned their blue-chip status.

Index Funds and the Beauty of the Stock Market

Bessimbinder’s findings provide several crucial takeaways for investors, particularly those working with wealth advisors or a family office.

1. Index Funds' Advantage: Index funds are challenging to beat for a reason. The SPIVA annual scorecard provides evidence supporting Bessimbinder's data. Index funds own both winners and losers, but the gains from the winners far outweigh the losses.

2. Winners > Losers: The stock market's beauty lies in its ability to allow winners to more than make up for the losers. This principle is a cornerstone of many successful financial plans, emphasizing the value of holding a diverse portfolio.

3. Compounding Power: Compounding over decades is powerful. No stock has maintained a crazy 20% or 30% annual return over 8-9 decades. However, the S&P 500’s average annual return of 10.3% from 1926 to 2023 illustrates how compounding over time results in substantial growth.

Application in Financial Planning

Understanding Bessimbinder’s research can significantly enhance your approach to financial planning, especially when working with a family office or wealth advisors.

1. Building a Robust Portfolio: By diversifying your investments and including index funds, you can build a robust portfolio that captures the market's positive skew. This strategy helps ensure that your financial plan benefits from the outsized returns of the biggest winners.

2. Long-Term Perspective: Embracing a long-term perspective and the power of compounding can help you achieve your financial goals. This approach aligns with the principles of Pinnacle Wealth Advisory (PNWA) and the expertise of Doug Greenberg, Certified Investment Management Analyst (CIMA), President of PNWA.

3. Navigating Market Volatility: Understanding that the stock market runs on power laws can help you navigate market volatility. By focusing on long-term growth and diversification, you can weather short-term fluctuations and achieve sustained financial success.

Conclusion

Bessimbinder's research offers a compelling case for diversification, the power of compounding, and the benefits of index funds. As you navigate your investment journey, keep these insights in mind. Embrace diversification, leverage the power of compounding, and consider the advantages of index funds to maximize your long-term investment success.

Working with wealth advisors or a family office like Pinnacle Wealth Advisory (PNWA) can help you implement these strategies effectively. Under the leadership of Doug Greenberg, Certified Investment Management Analyst (CIMA) and President of PNWA, you can develop a financial plan that captures the market's best opportunities and ensures long-term growth.