There are some concepts you hear about in life that make sense the moment you learn about them.
Occam’s Razor. The 80/20 rule. Murphy’s Law. Index funds.
Indexing made sense to me right off the bat. Low costs. Tax efficient. Low turnover. Low maintenance. Simple. And very hard to beat over the long-run (even by professional money managers).
I’ve been investing in index funds for more than 20 years. If anything the case for indexing has only gotten stronger over that time.
My baseline expectation was always that index funds would outperform something like 70-75% of actively managed funds.
The SPIVA Scorecard shows over 10, 15 and 20 year time horizons in recent decades that it’s been more like 90% or more for a wide variety of stock market styles:
One of the reasons I like index funds is because stock-picking is hard. Indexing allows you to cast a wide enough net to ensure you’ll hold the big winners, which more than make up for the big losers.
I didn’t fully comprehend just how concentrated the returns were in those winners until I read Hendrik Bessembinder’s work. In 2018, Bessembinder published Do Stocks Outperform T-Bills?
His research found that over the very long-term:
- Nearly 60% of all stocks underperform T-bills.
- Most other stocks barely outperform cash.
- Around 4% of stocks account for the vast majority of overall gains.
This research was like confirmation bias on steroids for indexers. I knew the stock market was concentrated but didn’t realize it was this concentrated. This is a big deal for index funds because you automatically own the biggest winners. And those wins tend to be enormous.
Bessembinder released an update to his findings last week in a new paper titled One Hundred Years in the U.S. Stock Market. Over the past decade the stock market’s long-term gains have become ever more concentrated:
Over the 1926 to 2016 period studied in Bessembinder (2018), 89 firms accounted for half of the $43 trillion in net wealth creation. After including outcomes for the most recent nine years, just 46 firms account for half of the $91 trillion in net wealth creation over the full century.
My new research assistant Claude combed through the data in his research to show it more visually.
Here’s a better look at how markets are skewed to the big winners:
It’s almost hard to fathom how much money was created by such a small subset of companies.
Here’s another way to look at this by the percentage of wealth created using the original study and the updated numbers:
From 1926-2025 just 208 companies created 75% of the wealth in the stock market.
Here’s a breakdown of how many stocks beat T-bills by 10-year increments:
The win rate over the past 40 years is surprisingly steady at around 50%, meaning half of the companies beat cash while the other half failed to keep up with the risk-free rate.
Of course, this study is the very long-term. Individual stocks can still experience gains before they eventually trail off. Not every investor is of the buy-and-hold variety. There are other opportunities in-between.
And index funds are nothing special. There are other ways you can create tax-efficient, long-term investment strategies within a simple, rules-based framework.
I’m not saying indexing is the only way to invest.
But the data shows why index funds are so tough to beat over the long haul.
Michael and I talked about Bessembinder’s research, the best stocks in history and much more on this week’s Animal Spirits video:
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Further Reading:
Debunking the Silly “Passive is a Bubble” Myth
Now here’s what I’ve been reading lately:
- Make a good guys list (Downtown Josh Brown)
- There will be no permanent underclass (Of Dollars & Data)
- How to survive in NYC (Musa al-Gharbi)
- Cliff Asness did not predict what’s going on in private markets (AQR)
- A man who stopped all of his vices with Ozempic (The Diagnosis)
- The end of content shortage (Seth Godin)
Books:
