Subject: Re: Bessembindar update
My assessment: A spectacularly misleading update to a spectacularly misleading study.
It's not that I doubt the accuracy of the results, I'm sure it's fine. But the idiosyncratic methodology guarantees the conclusion found.
(a skeptic might suspect they worked backwards from the result to pick the methodology!)

The key point is that all positions were held forever in their test.
Most companies do well for a very widely ranging stretch of time, then eventually fade and die in a (comparatively) predictable and short interval.
Thus, the return from a randomly picked company in a randomly picked year will probably be moderately positive, but might be strongly negative, depending on the luck of whether it happened to be one of its few years of impending death.
A broad slate of such firms will have a healthy average positive result in a fixed interval, since few will be in the death phase in percentage terms.
This is why a dartboard portfolio has a reliably good return, as do equal weight strategies.

But if almost all firms eventually head to oblivion, and all positions are held forever, almost all positions in the portfolio will fade to oblivion.
This is the strategy tested by the authors.
In this situation, the residual value will rest entirely with the few firms that have had longevity, giving the misleading impression that it is necessary to hold those very few returns in order to get a decent result.
Who here held Kodak throughout the many years that it took to die, including its bankruptcy? Or Bed Bath & Beyond, for that matter.

I assume their calculated result is correct.
But there is no need to hold the few long term winners in order to do well.
You don't have to be smart enough to pick them, and you don't have to own everything in order to ensure that you are holding them.
Any random slate beyond a minimum size will do just fine...provided you don't hold all positions forever.
If you know nothing, either sell every position after a year or two, or use some method to pick somewhat viable firms...like continued index membership.
Regularly reconstructed dartboard portfolios work very well, and so do equal weight index funds.
Over the long run, both are extraordinarily likely to beat a cap weight index of everything.
Despite the fact that the latter contains and is concentrated in the few very long run winners.

Specifically, to quote from the paper, they take a true observation and draw a false conclusion from it:
This finding does not contradict the evidence (see, for example, Dimson, Marsh, and Staunton, 2002)
that returns to broad stock markets handily outperform the returns earned on Treasury instruments
in the long run. Indeed, the mean buy-and-hold return across stocks in our sample greatly exceeds
the U.S. Treasury bill return at each horizon we study. Rather, the distinction between the positive
return premium for the broad stock markets and the negative premium for most individual stock returns
is a manifestation of the strong positive skewness in the distribution of returns to individual stocks,
particularly at longer horizons. This skewness in turn implies that the positive mean excess long-run
returns observed for stock portfolios are driven by very large returns to a relative few stocks.
No, it doesn't imply that, assuming this is a discussion about portfolio construction.
The skewness that matters here is temporal (did you unluckily hold a stock during its short death years), not inter-stock (did you hold one of the few long run winners).
If their reasoning were correct, a diversified (and periodically reconstructed) random portfolio of stocks that did not include the few long run winners would do badly, but it does well.
Same for a broad equal weight index, which has a pretty trivial amount of its funds allocated to the few very long run winners at any time.

Further in, they make the same, entirely wrong, conclusion
The results here confirm in a global sample that the wealth created by stock market investing is largely attributable to extreme positive outcomes to a relatively few stocks.
That's simply not true, for an individual portfolio.
Consider a strategy designed to fail because of the effect they claim:
Eliminate the ~2-3% of stocks that are very long run winners (beaters of T-bills).
Test a periodically rebalanced equal weight portfolio of all of the remaining stocks (their losers) over a long time period, and it not only does well, but also beats the long run cap weight index.
That's because, as they note, the average return of the average stock in the average time period is strongly positive.
All it takes to do quite well is to have a portfolio that catches that easy pitch.
Holding every stock till it goes bust isn't such a portfolio.

Jim