{"id":225032,"date":"2025-06-03T10:30:00","date_gmt":"2025-06-03T14:30:00","guid":{"rendered":"https:\/\/ibkrcampus.com\/campus\/?p=225032"},"modified":"2025-06-06T13:44:27","modified_gmt":"2025-06-06T17:44:27","slug":"most-stocks-suck-heres-how-to-spot-the-ones-that-dont","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/stocks\/most-stocks-suck-heres-how-to-spot-the-ones-that-dont\/","title":{"rendered":"Most Stocks Suck. Here\u2019s How To Spot The Ones That Don\u2019t."},"content":{"rendered":"\n<ul class=\"wp-block-list\">\n<li>Big drawdowns are just part of life in investing. Even a \u201cperfect portfolio\u201d equipped with godlike foresight would have seen a 76% drop in the past 100 years, along with five other plunges of 30% or more.<\/li>\n\n\n\n<li>Most stocks \u2013 around 60% of them \u2013 have underperformed boring old short-term Treasuries. And most of the market\u2019s actual wealth creation has come from a tiny number of stocks.<\/li>\n\n\n\n<li>And since most active managers typically underperform the S&amp;P 500, it\u2019s really not surprising that passive investing has continued to grow in popularity.<\/li>\n<\/ul>\n\n\n\n<p>With the uncertainty and overall&nbsp;<a href=\"https:\/\/finimize.com\/glossary\/volatility\">volatility<\/a>&nbsp;of the past few months, chances are you\u2019ve been thinking quite a lot about drawdowns. And you\u2019re hardly the only one. Investors have been busy rechecking their diversification and upping their safe-haven allocations, fearful about another gut-punching market drop. Even Morgan Stanley\u2019s been poring over an almost 100-year study about&nbsp;<a href=\"https:\/\/finimize.com\/glossary\/stock\">stock<\/a>&nbsp;returns to try to figure out what comes next.<\/p>\n\n\n\n<p>Here\u2019s what the investment bank has found.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-drawdowns-rebounds-and-winning-stocks\">Drawdowns, rebounds, and winning stocks.<\/h2>\n\n\n\n<p>Morgan Stanley recently flagged a heavyweight study from Hendrik Bessembinder \u2013 a University of Arizona finance professor who crunched nearly a century\u2019s worth of US stock data \u2013 28,600 companies from 1926 to 2024 \u2013 to figure out which shares actually built wealth for investors. And he defined \u201cwealth creation\u201d as beating the returns of one-month Treasury bills \u2013 you know, the very assets that&nbsp;<strong>Berkshire Hathaway<\/strong>&nbsp;has shoveled $378 billion into, because it can\u2019t find much else that meets its high investing bar.<\/p>\n\n\n\n<p>Turns out, most stocks flopped. Bessembinder\u2019s findings showed that almost 60% of those assets delivered returns that underperformed Treasury bills, essentially resulting in a $10.1 trillion loss of value through December 2024. The other 40% or so, meanwhile,&nbsp;<em>created<\/em>&nbsp;$89.5 trillion in value. And just 2% of the companies produced 90% of the total wealth creation of $79.4 trillion, with the top six (<strong>Apple, Microsoft, Nvidia, Alphabet, Amazon,<\/strong>&nbsp;and&nbsp;<strong>ExxonMobil<\/strong>) alone kicking in $17.1 trillion.<\/p>\n\n\n\n<p>He also zoomed in on 6,500 stocks from 1985 to 2024 to track their worst plunges. The median stock lost 85% from peak to trough, and took two and a half years to hit bottom and then another two and a half years to claw its way back to its previous highs. That is, if they managed a comeback: over half never returned to their peak. The average return was 340% of the original highs, but that\u2019s only because the market\u2019s highest-flyers skewed the stats upward. Remember the math of compounding \u2013 a 90% drop needs a tenfold return just to break even.<\/p>\n\n\n\n<p>Even the winners took a beating: Amazon dropped 95% during the dot-com crash. Nvidia fell by 90% in 2002 and took over four years to get back to its peak. Both eventually roared back to life \u2013 Nvidia\u2019s stock gained an average 39% a year over two decades \u2013 but the journey was anything but smooth. Even the S&amp;P 500 sank 58% at one point.<\/p>\n\n\n\n<p>And that\u2019s actually par for the course. As Charlie Munger \u2013 Warren Buffett\u2019s legendary right-hand man \u2013 has famously said, you have to expect a 50% investment drop two or three times a century.<\/p>\n\n\n\n<p>And with just a small clique of stocks driving most of the market\u2019s gains, it\u2019s no wonder even the pros struggle to stand out. Only 35% of active fund managers beat the S&amp;P 500 in 2024. And that\u2019s far from an anomaly \u2013 it\u2019s right in line with the norm, according to&nbsp;<a href=\"https:\/\/www.spglobal.com\/spdji\/en\/spiva\/article\/spiva-us\/\" target=\"_blank\" rel=\"noreferrer noopener\">S&amp;P Global<\/a>.<\/p>\n\n\n\n<p>Makes sense, then, that index trackers on the S&amp;P 500 ETF have taken off \u2013 they perform better and often charge a lot less than managed funds helmed by professional stock pickers.<\/p>\n\n\n\n<p>That being the case, University of Chicago finance professor Wes Gray did a further thought experiment with the S&amp;P 500 data. He wanted to know what would happen if you could build the perfect stock portfolio with godlike foresight, picking the companies that would deliver the highest total shareholder return, rebalancing every five years, and weighting it all by market cap, from 1927 to 2016. Even that \u201cperfect-foresight portfolio\u201d saw a whopping 76% drawdown (from August 1929 to May 1932), along with five other stomach-dropping plunges of 30% or more.<\/p>\n\n\n\n<p>So, yes: even a flawless portfolio can rattle your nerves. And that\u2019s why it\u2019s important not to wager the money you might need in the short term in stocks \u2013 the market might not be kind when you need to cash out.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-and-how-to-take-advantage-of-the-rebounds\">And how to take advantage of the rebounds.<\/h2>\n\n\n\n<p>Even though passively investing in broad-based, index-tracking ETFs makes a lot of sense, there\u2019s still value in knowing what separates the stock winners from the flatliners.<\/p>\n\n\n\n<p>For starters, top performers tend to fall less, recover faster, and outperform over time. So if you\u2019re watching stocks or screening them using&nbsp;<a href=\"https:\/\/finviz.com\/\" target=\"_blank\" rel=\"noreferrer noopener\">Finviz<\/a>, look for the ones that hold up better than the rest during a selloff. They\u2019re often the ones that bounce most when sentiment improves.<\/p>\n\n\n\n<p>And then weigh up the company, asking these questions, put together by Morgan Stanley Investment Management, after its deep dive into Bessembinder\u2019s research.<\/p>\n\n\n\n<p><strong>Is the company\u2019s decline \u201ccyclical\u201d or \u201csecular\u201d?<\/strong>&nbsp;Cyclical pain \u2013 for example, a slowdown caused by a&nbsp;<a href=\"https:\/\/finimize.com\/glossary\/recession\">recession<\/a>&nbsp;\u2013 can and usually does pass. But a secular wound is terminal. That\u2019s why&nbsp;<a href=\"https:\/\/finimize.com\/glossary\/hedge\">hedge<\/a>&nbsp;fund founder Bill Ackman recently grabbed up shares of Amazon: its stock dip was about big economic worries, not life-or-death fears about the tech giant itself.<\/p>\n\n\n\n<p><strong>How does the company make money?<\/strong>&nbsp;If the company creates value, there\u2019s hope for a rebound. Check out its customer lifetime value, for instance: the metric subtracts customer acquisition costs from the present-day value of the cash flows a customer generates over time for the firm.<\/p>\n\n\n\n<p><strong>How committed is this company to big, expensive projects?<\/strong>&nbsp;Flexible companies that have fewer massive sunken costs can be a lot more nimble when they need to be.<\/p>\n\n\n\n<p><strong>How strong are its finances?<\/strong>&nbsp;Distressed stocks generally underperform safer stocks. So check out a company\u2019s financial strength before wading in, especially after a big drawdown. Healthy balance sheets bounce, but weak ones break.<\/p>\n\n\n\n<p><strong>Can the company raise funds if it needs to?<\/strong>&nbsp;A lack of liquidity can lead to big troubles, even if a company is solvent.<\/p>\n\n\n\n<p><strong>How honest is the leadership team?<\/strong>&nbsp;When there are issues, denial only delays turnarounds. But transparency tends to speed them up.<\/p>\n\n\n\n<p>So when your portfolio takes a hit, don\u2019t flinch \u2013 remember this is all part of the drill. Instead, ask the tough questions and run the test. If it passes, it might be worth sticking around for the rebound.<\/p>\n\n\n\n<p>&#8212;<\/p>\n\n\n\n<p>Originally Posted June 3, 2025 &#8211; <a href=\"https:\/\/finimize.com\/content\/most-stocks-suck-heres-how-to-spot-the-ones-that-dont\">Most Stocks Suck. Here\u2019s How To Spot The Ones That Don\u2019t.<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>With the uncertainty and overall volatility of the past few months, chances are you\u2019ve been thinking quite a lot about drawdowns. <\/p>\n","protected":false},"author":1634,"featured_media":222699,"comment_status":"open","ping_status":"closed","sticky":true,"template":"","format":"standard","meta":{"_acf_changed":true,"footnotes":""},"categories":[6,8,9,22,26,3],"tags":[2424,19664,1064,19665,19663],"contributors-categories":[13597],"class_list":{"0":"post-225032","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-north-america","8":"category-region","9":"category-securities","10":"category-stocks","11":"category-text-articles","12":"category-traders-insight","13":"tag-active-management","14":"tag-market-underperformance","15":"tag-stock-selection","16":"tag-treasury-comparison","17":"tag-wealth-creation","18":"contributors-categories-finimize"},"pp_statuses_selecting_workflow":false,"pp_workflow_action":"current","pp_status_selection":"publish","acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v26.9 (Yoast SEO v27.5) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<title>Most Stocks Suck. 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