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Here's a March 2023 update of Hendrick Bessembinder's work published in 2018 showing that a very high fraction of all wealth creation has come from a small number of stocks. The original work covered data back to 1926; the update covers the period 1990- 2020.

"Abstract:
We study long-run shareholder outcomes for over 64,000 global common stocks during the January 1990
to December 2020 period. We document that the majority, 55.2% of U.S. stocks and 57.4% of non-U.S.
stocks, underperform one-month U.S. Treasury bills in terms of compound returns over the full sample.
Focusing on aggregate shareholder outcomes, we find that the top-performing 2.4% of firms account for
all of the $US 75.7 trillion in net global stock market wealth creation from 1990 to December 2020.
Outside the US, 1.41% of firms account for the $US 30.7 trillion in net wealth creation."

file:///Users/danielroberts/Downloads/SSRN-id3710251.pdf

Do you buy the conclusion that an equal weighed index fund is the solution?

"Do you buy the conclusion that an equal weighed index fund is the solution?"

That should be Brett Arends's conclusion in Marketwatch.

Marketwatch article,

https://www.marketwatch.com/story/most-stocks-end-...

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

This is what I am here for (apart from the "Old Ladies afternoon tea time"). It's nice and very useful to have informative posts, updating one on the current state of buybacks, on current BV or another few % of an aquisition.

But this one is on a different level, is outstanding, for me is one of the real gems you don't find that often. Which raises the question what the board would do or rather become without the guy who posted it. I don't want to do injustice to others here with quality posts, but I think it's a fact that this board is very dependent on the input from one guy (who was already nearly lost not long ago), and I don't think that's exactly promising regarding the longevity of this board.

I am wondering whether there aren't more people who might be capable of such, but are lurking only. If so, I hope they can get off their ass and enlighten us too.

I couldn't name that guy to avoid that his Ego inflates too much.
Sorry, Mister :-)

...this board is very dependent on the input from one guy...

My suggestions would be--

(1) If someone is posting a link, PLEASE don't post only the link. Most especially if it's a time-sucking video.
Summarize it, or at least say what you think is right or wrong or thought provoking about it.
This isn't Twitter, and we don't need to reinvent it here : )
I think ensuring all posts have a bit of actual content raises the overall quality and attractiveness of the board.

(2) Provided Manlobbi does not object, maybe encourage a few more off topic posts?
Not too far off topic, and marked OT in the subject.

My thinking is that this community probably has some interesting insights on neighbouring subjects.
Other value stocks which a Berkshire aficionado might be interested in.
Starting with the usual suspects like Markel, but perhaps including the sorts of things that were sometimes discussed very thoughtfully at the old Falling Knives board.

Maybe even popular or topical stocks that do not fall into that investing category, but avoided by this group for interesting and informative reasons.
(Bitcoin isn't a Berkshire-type allocation of capital, but the *reasons* that it isn't on style can be interesting)

The occasional macro-ish issue that might be of interest: for example the recent discussions on China exposure were good, or why inflation might do a particular thing.
Different takes on successful long term investing approaches in general.

Maybe even something, occasionally, that is just plain wildly OT.
The old board's discussions on the pandemic were perhaps too numerous, but I think we probably all learned something useful at some point, and its all-pervasiveness was a pretty good excuse to go way OT.
Some stuff was wrong with hindsight but well thought out nonetheless.

Obviously we still want to keep the traditions of avoiding contentious politics or flat-out false memes.
Bottom line, the main sign of a moribund forum is insufficient content.
So we need more.

(3) Invite others you think might appreciate the place.
Send them a link to some post here that you found worth reading.

(4) If you have an insightful thought yourself, or even an interesting question, post it!
Don't rely on people posting the occasional news item about Berkshire as the only source of new threads.
Here's one:

Can somebody make suggestions on the best way to assign a value to the entities that Berkshire accounts for using the equity method?
(there are even separate sub-categories of equity method accounting that are materially different--OXY and KHC are both equity method, but treated differently I believe)
At the moment, any distribution from KHC is accounted for as a reduction in its carrying value on the balance sheet.
I honestly don't know how that reduction shows up on the income statement. Earnings, or only distributions?
Better to take it entirely out of book value, and put it back in as either market value of the shares or (my preference) a multiple of the earnings both distributed and retained, as I do with an operating subsidiary.
(With a suitable adjustment to the earnings estimate if the most recent four quarters are particularly atypical)
This is a long, complicated subject. If anyone knows the equity method accounting well enough to comment on it, I for one would certainly welcome a thread on that.

Jim

"My assessment: A spectacularly misleading update to a spectacularly misleading study."

Thank you, Jim. Insightful, again.

"My assessment: A spectacularly misleading update to a spectacularly misleading study."
...
Thank you, Jim. Insightful, again.

Doesn't mean I'm right, of course.
I'm never at a loss for an opinion!

Jim

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.


I thought maybe the returns ended up being (a) the few very long-term stocks that did well plus (b) the dividends received.

If the key to getting good returns is to dump the bad shares before they go to zero, then how do you know which ones are going to zero? And how do you square this idea with the observation that stocks dumped from an index tend to do better, not worse, than the average?

dtb

DTB
And how do you square this idea with the observation that stocks dumped from an index tend to do better, not worse, than the average?

Do you happen to have any references about stocks performing better after being removed from an index?

My guess is that when it is apparent that they are going to be removed, there is an initial sell off by institutions from funds and ETFs, so when the stock is actually removed, it has already had a significant drop. Then over the next 6 to 12 months there is a rebound. So it looks like the stock is performing better, but it is really just recovering to what it was before the sell off.

Craig

And how do you square this idea with the observation that stocks dumped from an index tend to do better, not worse, than the average?
...
Do you happen to have any references about stocks performing better after being removed from an index?


It's a very big effect. Even though it hits only a small minority of stocks in an index, it has a material effect on the index as a whole.
Here's one random article from Research Affiliates.
https://www.researchaffiliates.com/publications/ar...
A salient paragraph:
" fully half of discretionary deletions finish the subsequent 12-month period ahead
of their effective closing price relative to the market. Because the gains tend to be
significantly larger than the losses, the discretionary deletions beat the market by
nearly 20% over the next 12 months, on average. As a result, in the first six months
following the rebalance, the additions tend to lag the deletions by 14%, and by month
12, the additions lag by 20%."

(this is another older article of theirs on the same subject https://www.researchaffiliates.com/publications/ar...
Short summary: "The additions WIN BIG before they're added; deletions LOSE BIG before they're dropped. The pattern reverses the year after an index change." )

They mention the overall effect and its magnitude, and go into detail on the specific replacement of AIV with TSLA a couple of years ago.
After the swap, TSLA dropped like a stone and AIV did wonderfully. This specific example is just one story, but it's entirely typical.
(in the subsequent six months, the entire index was 0.41% lower than it would have been had this single swap not occurred)
Remember that conventional market-wide cap-weight indexes are big outliers in terms of [bad] performance: almost any other portfolio weighting method you try will usually do better, most obviously equal weight.

But my comment is more general than this [relatively] short term effect: only relatively plausible firms get added to an index, and sometimes firms that are in the process of going bust are ejected from the index before that happens.
(Certainly not all losers are caught...for one thing, index membership is not updated that frequently...but eliminating even a few very bad outcomes is nice)
Consequently, using index membership as your hunting ground for a roll-your-own broad sampling portfolio can perform a valuable service to
(a) eliminate at least a few particularly bad outcomes, and
(b) introduce newly-plausible firms.
The outer non-index hinterland of the markets is full of a lot of stuff that is not really made up of suitable investment candidates, for a wide variety of reasons.

If you wanted to make best use of both effects, I suppose you could use as your eligibility list "anything that was in a major index six months earlier and is still trading"
(the "still trading" bit is because you don't generally want to invest in things that are in the process of being bought out)

Jim

(2) Provided Manlobbi does not object, maybe encourage a few more off topic posts?
Not too far off topic, and marked OT in the subject.

I'm pretty sure Julian wouldn't object a few off topic posts. I certainly enjoy posts from other intelligent like minded people on different subjects.
Be it Tesla or living in southern France, if it doesn't get too excessive it's a welcome diversion in my view! If you are not interested simoply skip those posts, that's what I do.

I'd certainly like to see more posts about interesting investment ideas. I posted about VTS last December: https://www.shrewdm.com/MB?pid=610354290 I added a bunch after the spin off and it worked out very well so far but unfortunately I lacked the confidence to make it a really big position because I wasn't familiar with the industry.

Regarding the article Jim pointed to:
https://www.researchaffiliates.com/publications/ar...

Surprisingly, I wasn't able to locate a comprehensive source for changes in the S&P. I wouldn't think that would be difficult, but the best I could come up w/ was Wikipedia: https://en.wikipedia.org/wiki/List_of_S%26P_500_co....

Looking through that list, and discarding acquisitions and the FDIC Receivership stuff, I went back one year and compiled this list:

TKR DATE $ Curr $ % Chg
lumn 3/20/2023 2.49 1.96 -21.29%
vno 1/5/2023 21.37 13.33 -37.62%
pvh 9/19/2022 54.98 89.01 61.90%
penn 9/19/2022 31.41 25.64 -18.37%
ipgp 6/21/2022 93.21 114.61 22.96%

AVG 1.52%

Small sample and not conclusive, but does not seem to support the thesis.
NOTE: I should add market returns to that for comparison. Don't have time right now.

John

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