most of gains come from small number of stocks

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most of gains come from small number of stocks

Postby larryswedroe » Fri May 03, 2013 1:45 pm

I think most people will be surprised at the data
Hope you find it helpful

http://www.cbsnews.com/8301-505123_162-57582728/stock-market-gains-come-from-few-top-performers/

Best wishes
Larry
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Re: most of gains come from small number of stocks

Postby Random Musings » Fri May 03, 2013 4:59 pm

The "fat tail" of those 10% of equities making a strong majority of returns is part of the allure of active investing. If things were not so skewed, less people would be active since the allure of hitting a home run would be diminished.

RM
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Re: most of gains come from small number of stocks

Postby MindBogler » Fri May 03, 2013 5:02 pm

Random Musings wrote:The "fat tail" of those 10% of equities making a strong majority of returns is part of the allure of active investing. If things were not so skewed, less people would be active since the allure of hitting a home run would be diminished.

RM

It's the same carrot and stick that gets people to buy lottery tickets every week.
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Re: most of gains come from small number of stocks

Postby CABob » Fri May 03, 2013 5:18 pm

Clearly a small number of stocks are responsible for a majority of the gains -- about 10 percent of stocks recorded huge wins in excess of 500 percent.

But my broker/advisor says he can pick those stocks.
:twisted:
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Re: most of gains come from small number of stocks

Postby otbricki » Fri May 03, 2013 7:04 pm

CABob wrote:
Clearly a small number of stocks are responsible for a majority of the gains -- about 10 percent of stocks recorded huge wins in excess of 500 percent.

But my broker/advisor says he can pick those stocks.
:twisted:


Ask him why he's still a broker/advisor. :P
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Re: most of gains come from small number of stocks

Postby umfundi » Fri May 03, 2013 10:22 pm

larryswedroe wrote:I think most people will be surprised at the data
Hope you find it helpful

http://www.cbsnews.com/8301-505123_162-57582728/stock-market-gains-come-from-few-top-performers/

Best wishes
Larry

Larry,

I think this is an unappreciated fact that explains a lot!

most of gains come from small number of stocks


And, that group does not repeat year to year (so much for momentum).

So, the median stock underperforms the averages. A random subset of stocks will likely underperform the averages, particularly if they are not cap-weighted.

I suspect that the statistics you quote in your article for the performance of groups of stocks would equally apply to the performance of money managers who select subsets of the stocks comprising the index.

Keith
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Re: most of gains come from small number of stocks

Postby nedsaid » Fri May 03, 2013 10:34 pm

A lot of the S&P 500 companies in 1990 that don't exist anymore as independent companies got merged into larger companies. Gillette comes to mind. Heinz is another example. Sometimes companies get acquired only to get spun out later. I think of NCR and Kraft as examples of this.

If I could predict the great performers, I wouldn't be still working at my current employer. It is incredibly hard to do and there is no evidence that anyone can consistently do it.
A fool and his money are good for business.
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Re: most of gains come from small number of stocks

Postby cheese_breath » Fri May 03, 2013 11:16 pm

CABob wrote:
Clearly a small number of stocks are responsible for a majority of the gains -- about 10 percent of stocks recorded huge wins in excess of 500 percent.

But my broker/advisor says he can pick those stocks.
:twisted:

They all say that.
The surest way to know the future is when it's the past.
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Re: most of gains come from small number of stocks

Postby ofcmetz » Sat May 04, 2013 12:22 am

Thanks for the article Larry. Crazy that such a small number of stocks drive those returns. Indexing is the way to go.
Showing up at the donut shop at 5 am to get them hot out of the oil is an example of successful market timing.
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Re: most of gains come from small number of stocks

Postby Clive » Sat May 04, 2013 3:40 am

For the period 1983-2008...about 20 percent of stocks lost nearly all of their value.
...
If you excluded the top 10 percent of performers, the return would have been only 6.2 percent. If you exclude the top 25 percent, the return becomes slightly negative at -0.6 percent -- the top 25 percent of performers accounted for more than 100 percent of the returns. Of course, if one could eliminate the bottom 10 or 25 percent of the performers, returns would increase just as dramatically.

Might it be that small cap value, stocks with perhaps book value > share price, are inclined to have fewer total failures - and as such relatively outperform?

Assuming a tactic of elimination of the bottom 10 or 25 percent, small, low book value to price i.e. small cap growth might be a reasonable broad filter.

Migration by Fama & French

The size premium is due almost entirely to the extreme positive returns of small stocks that move to a big stock portfolio from one year to the next. Three factors contribute to the value premium. (i) Plus transitions, with their high returns, occur more often for value stocks than for growth stocks. (ii) Minus transitions and their low returns are more likely for growth stocks. (iii) Value stocks that remain in the Same portfolio from one year to the next have higher average returns than the matching (small or big) growth stocks.
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Re: most of gains come from small number of stocks

Postby jimkinny » Sat May 04, 2013 8:04 am

Thanks for the information. Pretty amazing.

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Re: most of gains come from small number of stocks

Postby larryswedroe » Sat May 04, 2013 8:49 am

umfundi

And, that group does not repeat year to year (so much for momentum).


MOM is short term phenomenon with reversion in longer term.

Stocks that have done relatively well (poorly) in the past YEAR tend to do well for a short while longer (like 4-5 months on average) and then tend to mean revert in performance. That's why MOM is a relatively high turnover strategy.

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Larry
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