Hendrik Bessembinder of Arizona State's W.P. Carey School of Business opens his landmark study, "Do Stocks Outperform Treasury Bills?"1, with a wink at his own title: "The question posed in the title of this paper may seem nonsensical." Of course stocks beat T-bills. Everyone knows that. The equity premium is so big that academics literally call it a puzzle.
Here's the twist. When Bessembinder examined every CRSP common stock from 1926 to 2016, he found that most individual stocks don't beat T-bills at all. Most don't even survive the comparison.
The Typical Stock Lets You Down
The numbers are blunt. Only 42.6% of stocks beat one-month Treasury bills over their lifetimes, dividends included. More than half lose money outright. And the single most common lifetime outcome? Bessembinder writes that it "is a loss of 100%." Roughly one stock in eight went to essentially zero.
So how does the market keep making money? A small group carries everyone else. As Bessembinder puts it, "the positive performance of the overall market is attributable to large returns generated by relatively few stocks." The average stock isn't the story. The exceptional one is.
Blame the Math, Not the Models
Does this break the idea that investors get paid for taking risk? Not really. Pricing models talk about average returns. This evidence is about the middle of the pack. Bessembinder notes his results "are not necessarily at odds with the implications of standard asset pricing models."
The bridge between the two is skewness. A handful of monster winners drag the average way up while the typical stock sits underwater. And here's the part most people miss: time itself creates this lopsidedness. Even if monthly returns were perfectly balanced, "the compounding of random returns induces positive skewness in the multi-period return distribution," and volatile stocks feel it most. With individual stocks bouncing around at 18.1% monthly volatility, lottery-ticket outcomes aren't a fluke. They're arithmetic.
Who Actually Created the Wealth?
This is the finding everyone quotes, and it earns the attention. Measured against T-bills, roughly 25,300 firms created $34.82 trillion for shareholders through 2016. Five companies, Exxon Mobil, Apple, Microsoft, GE, and IBM, produced 10% of it. Ninety firms produced half. Just 1,092 firms, a bit over 4%, produced all of it. The other 96%? They "collectively generate lifetime dollar gains that matched gains on one-month Treasury bills."
His simulations make it personal. Hold one random stock each month for 90 years, and you'd have trailed the market in 96% of trials and trailed T-bills in 73%. Spread out across 100 stocks and things improve fast: 93.1% of decade returns beat T-bills. But even diversified random portfolios beat the value-weighted market less than half the time, which helps "to explain why active portfolio strategies most often underperform benchmarks" before a dime of fees.
Where It Hurts Most
The pain isn't spread evenly. It piles up in small caps, in exchange-delisted names (just 6.8% beat T-bills), and in anything listed after the mid-1960s. Every cohort of new listings since 1977 has a negative median lifetime return. Public markets, especially at the small end, now look a lot like venture capital. Lots of losers, a few spectacular wins.
To be fair, Bessembinder doesn't dismiss stock picking. The results "highlight the potentially large gains from active stock selection" for anyone who can genuinely spot the home runs early. Whether that skill exists, and whether you can find it, "remains" the open question.
Five Takeaways for Advisors and Investors
1. Diversification isn't just about smoothing the ride. It's about catching the winners. Miss the top 4% and you've missed everything.
2. Concentrated active strategies should expect to trail the index, even with zero fees and zero mistakes. The math alone tilts against them.
3. The median stock loses to cash. Start there when a client won't let go of a single-stock position.
4. Time doesn't fix single-stock risk. It magnifies it. Compounding makes the skew worse the longer you hold.
5. Chasing lottery upside is a choice, not a free lunch. The most likely outcome is falling behind.
When the odds are this lopsided, discipline isn't optional. It's the whole game.
Footnote:
1 Bessembinder, Hendrik. "Do Stocks Outperform Treasury Bills?" Journal of Financial Economics, forthcoming, May 2018. SSRN, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2900447.
