The Strange Truth About Stock Returns

In this episode of Financial Sentiments, Nick Haberling, CFP®, explores a surprising truth about stock market returns: stocks have been one of history’s greatest wealth-building tools, even though most individual stocks have produced disappointing results.

Over the past century, a remarkably small percentage of companies have generated nearly all of the stock market’s net wealth creation. This episode explains why most stocks underperform Treasury bills, how even successful companies can become poor investments when purchased at the wrong price, and why identifying the market’s future winners is so difficult.

Nick also discusses why these findings support an evidence-based approach to investing. Rather than trying to predict which companies will outperform, investors can broadly diversify across thousands of companies to increase their chances of owning the relatively small group of stocks that drive long-term market returns.

Read the original article here:
https://financialsentiments.com/blog/2026/7/7/the-strange-truth-about-stock-market-returns

Have a question or want to talk about your financial plan?
Email Nick at nhaberling@hfgtrust.com or book a meeting here:
https://bookings.cloud.microsoft/book/HFGTrustNickHaberling@HFGTrust.com/?ismsaljsauthenabled=true

Transcript

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SPEAKER_01 0:00

Quick question before we get into it. If I told you that six out of every 10 publicly traded stocks underperformed U.S. Treasury bills, would you believe me? Because that's not a hypothetical, that's the actual math. And today we're going to unpack why that's true, why it doesn't mean what you think it means, and what it tells us about how we should actually be investing our money. Hello and welcome to the Financial Sentiments Podcast. I'm Nick Haberling, a financial advisor at HFG Trust. And in this podcast, we explore the investment and planning decisions that actually simplify financial life, cutting through the noise to focus on what truly matters. So let's start with the good news because there is good news here. For the last 100 years, the single most reliable way for people to build wealth has been to just consistently invest in publicly traded stocks. And the numbers back this up in a big way. There's a paper, and it's the one that we'll be leaning on for most of this episode, and it's called 100 Years in the U.S. Stock Markets by Professor Hendrik Bessenvender at Arizona State University. And here's the headline stat. One dollar invested in January of 1926 would have grown to just over $15,000 by the end of 2025. That's a 10.1% annualized return compounded over a century. That's the story we all know. Buy stocks, hold for a long time, and get rich over time. Awesome. Except, and here's where it gets weird. That headline number is hiding something almost nobody talks about. And honestly, until the study came out, almost no one knew about. Bess and Mender looked at every single publicly traded stock issued in the U.S. since 1926. That's just under 30,000 companies, 29,754 to be exact. And here's the punchline. Only about 41% of them outperformed the return you'd have gotten from just holding one-month treasury bills, T bills, the safest, most boring investment there is. Let that sit for a second. In investing, we talk about something called a risk premium. The idea that if you're going to take on the risk of owning a company's stock, you should expect to be paid extra for that risk, above what you'd get from a virtually risk-free government bond. That's the whole justification for investing in stocks at all. But in six out of ten cases, historically, you would have been better off just lending your money to the US government. There was no risk premium involved, and often actually wealth destruction. Now, Bessenbender didn't stop at a win rate. He also measured something called shareholder wealth creation, basically how much actual dollar wealth a company generated for its investors above and beyond what treasury bills would have paid. And when you rank every company in U.S. history by this measure, the picture is almost absurdly lopsided. Roughly 59% of all firms actually destroyed shareholder wealth relative to T-bills, collectively wiping out on the order of nearly $10.7 trillion. Now the next 37% of companies did just enough to cancel out those losses. Basically a wash. And that leaves about 4% of companies, just 4%, and that tiny sliver is responsible for essentially all the net wealth created in the US stock market over the last 100 years, somewhere around $91 trillion. So when you hear the quote, the stock market returned 10% a year for a century, what's really happening under the hood is this a huge pile of companies lose, a slightly smaller pile of companies do just good enough to wash out those losers, and a tiny handful of superstar companies carry the entire market on their back, which raises the obvious question: why don't we just find those superstar companies and buy them? Now, here's where I want to bring in a story that actually crystallized this for me. A few weeks back, I came across a LinkedIn post from Vitaly Katzenelson. He is a value-focused investor who runs investment management associates. And he was breaking down the price history of Cisco. Now, according to Best Mender's data, Cisco is the 27th greatest wealth creating company in American history. It's at the top of the list a clear winner. But, and this is the catch, that ranking starts from the day Cisco went public. It doesn't account for when you, as an individual investor, actually bought the stock. And Vitale's chart showed this brutally well. If you bought Cisco at the peak of the dot-com bubble, it took you 25 years and an entire AI infrastructure boom just to get back to even. Even if you'd bought Cisco at a 52% discount off those dot-com bubble highs, you were still underwater for 17 years. So here's the lesson buried in that. A great company and a great stock investment are not the same thing. You can absolutely overpay for a fantastic business at the wrong moment in its history. And that nuance just doesn't show up when you're looking at 100 years of aggregate data. Now, stretch that idea out from one stock to an entire profession, because this is exactly the problem active fund managers run into. Active management is the premise of I can find stocks that are underpriced and eventually the market will agree with me and the price will rise. It's a nice story, but it doesn't really hold up. There's a report that Standard Imports, SP, puts out every year called the SPIVA scorecard. It compares actively managed funds against their benchmark indexes. And here's a fun fact: when I show people the scorecard, most people misread the numbers as success rates, but they're actually failure rates. They show the percentage of funds that underperform their benchmark. And that number typically sits at 90 to 95% underperforming the benchmark. So why would anyone choose a strategy that loses to a simple index 90 to 95% of the time? All right, so here's where we're going to put it all together. The correct takeaway from Bess and Mender's paper isn't that there's a lot of money to be made picking the right stocks. Even though technically that's true, it's very difficult to do. The real practical lesson is this we tend to hurt our own returns by trying to pick stocks in the first place. And there are two reasons for that. The first reason is that markets are efficient. The stock's price at any given moment generally reflects a reasonable read of all the publicly available information about it, which means it's really hard to consistently outguess what the market already knows. And because of that, we simply don't know ahead of time which companies are going to be the big winners. And reason two is that most stocks are losers. We already covered this. Nearly six in 10 stocks failed to beat T-bills over their lifetime. And in the case of Cisco, even a company that turns out to be a long-term wealth creator can be a terrible investment depending on when you bought it. So when we overweight our portfolios with losers, which statistically we're prone to do, we're automatically underweighting the winners we didn't know to look for. So what's the alternative? If we can't identify the future winners ahead of time, the rational move isn't to try to get better at guessing, it's just to own the entire market. That means building a portfolio with exposure to thousands of companies across US and global markets. Yes, a lot of those companies will disappoint, but broad diversification means you're also virtually guaranteed to own that small group of companies that end up driving the real long-term wealth creation, the 4%. And here's the underrated bonus. Once you stop spending time and energy trying to pick stocks, you free up that energy for things that are actually within your control. Getting your stock to bond allocation right, managing taxes efficiently, coordinating retirement income, and planning your estate and charitable giving. So here's the hundred-year paradox, and I think it's worth sitting with. Stocks as a whole have been one of the most extraordinary wealth-building tools in human history. And at the very same time, most individual stocks have been disappointing, even losing investments. Evidence-based investing doesn't try to resolve that contradiction, it just accepts both halves of it. Stay optimistic about what markets can do for you over the long run, but stay humble about your ability or anyone's ability to know in advance which 4% are going to carry it. That's it for this episode. If you'd like to explore whether your portfolio is invested with diversification in mind, you can reach out to me directly by email. The address is in the show notes, or if you'd prefer, you can schedule an introduction meeting at your convenience using the calendar link, also in the show notes. Hope you have a great day.

SPEAKER_00 8:41

This podcast is for informational and educational purposes only and should not be considered financial, investment, tax, or legal advice. Opinions expressed are the representative's own and may change over time. Investing involves risk, including the potential loss of principal. Before making any decisions, please consult with your own financial, tax, or legal advisor. This podcast is produced by a representative of HFG Trust, a Washington state chartered trust company.