Most Companies Are Bad Investments
Most investors know that over the long-term, the US stock market has generated an average return around 10%. But what most don’t realize is that over the last 90 years, the most common return for an individual stock is negative 100%. A complete loss.
I’ve written previously about Hendrik Bessembinder’s research evaluating the lifetime returns for every U.S. common stock traded on the New York and American stock exchanges and the Nasdaq since 1926. His findings:
Just 86 stocks have accounted for $16 trillion in wealth creation, half of the stock market total, over the past 90 years. All the wealth creation can be attributed to the thousand top-performing stocks, while the remaining 96 percent of stocks collectively matched one-month T-bills.
Stock picking is really hard because most individual stocks are losers.
Last year, 18,926 US businesses filed for some form of bankruptcy. Just this year we’ve seen bankruptcies from famous brands like Tupperware, Big Lots, Buca di Beppo, Fisker, Red Lobster, Express, and Joann (just to name a few).
Today, forty-two percent of companies in the Russell 2000 have negative earnings. For the mid-cap index, the number is 14%, and for the S&P 500, it is 6%.
Some of these companies with negative earnings will turn things around achieve profitability. A large portion never will. Some of the companies that are currently profitable will fall out of favor and go out of business. A small portion of these profitable companies will continue to get more profitable.
The problem is that we don’t know which ones are which.
To complicate things further, some of the companies that are currently profitable, will get more profitable BUT they will still be terrible investments because their earnings multiples will decline. For example, here is a long-term stock chart of Cisco Systems.
If you bought it back in the dot com bubble, you are still underwater despite the company consistently growing earnings for more than two decades.
In 2000, people thought Cisco was a great company and they were willing to pay roughly 130 times the forward earnings. Cisco turned out to be a great company but today investors are only paying a little over 20 times earnings.
Keep this in mind when someone talks about all the great things a company will do in the future. That prediction can be true, and it can still be a terrible investment.
On a personal note, my youngest turned 7 yesterday. Here we are hanging out at the bus stop before school. She is currently my favorite child.
When it comes to writing about investments, the disclaimers are important. Past performance is not indicative of future returns, my opinions are not necessarily those of TSA Wealth Management and this is not intended to be personalized legal, accounting, or tax advice etc.
For additional disclaimers associated with TSA Wealth Management please visit https://tsawm.com/disclosure or find TSA Wealth Management's Form CRS at https://adviserinfo.sec.gov/firm/summary/323123