Should-Read: Hendrik Bessembinder: Do Stocks Outperform Treasury Bills?

Should-Read: A remarkable fact—especially since a number of companies end their listing periods on CRSP when they are acquired. That you are more likely to not to have better performance over the lifetime of a company by simply putting your money in Treasury bills is striking evidence of skewness—and the extraordinary benefits to diversification. It also means that, in a world with lots of undiversified portfolios, successful wealth is unlikely to be significant evidence of portfolio-choosing skill: those who were lucky enough to get in on the ground floor of Xerox or Apple will turn out to have outperformed and to be richer than those who knew what they were doing: Hendrik Bessembinder: Do Stocks Outperform Treasury Bills?: “Most common stocks do not outperform Treasury Bills…

…Fifty-eight percent of common stocks have holding period returns less than those on one-month Treasuries over their full lifetimes on CRSP. When stated in terms of lifetime dollar wealth creation, the entire gain in the U.S. stock market since 1926 is attributable to the best-performing four percent of listed stocks. These results highlight the important role of positive skewness in the cross-sectional distribution of stock returns. The skewness in long-horizon returns reflects both that monthly returns are positively skewed and the fact that compounding returns itself induces positive skewness. The results also help to explain why active strategies, which tend to be poorly diversified, most often underperform…

January 27, 2018


Brad DeLong
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