Why Stockpicking is Hard

Have you ever wondered why 90-98% of professional stock market investors fail to beat the index? After all, the index is a collection of good, mediocre and bad companies. It shouldnot be that hard to outperform a random collection of 'average' companies, right?

Well, look at this study from Prof. Dr. Bessembinder at ASU:

Analysing 28,114 US listed companies, his team found that only 41% have a positive lifetime contribution.

But get this:

• The top 10 companies (0.04%) are responsible for 20% of wealth created
• The top 100 companies (0.35%) make up 56% of wealth created
• The top 1000 companies (3.6%) make up 100% (!) of wealth created
• The remaining 27,114 companies (96.4%) provide ZERO wealth!

So when you are picking stocks, trying to beat the market, the odds are terribly tilted against you.

That's the reason it is so hard to outperform (or even match) an index like the S&P 500. That's why most investors are better off simply investing in a low-fee ETF replicating the entire market.

It's not trading costs, management fees, timing mistakes or other reasons often cited to explain the underperformance of inidivual and professional investors. It is the leptokurtosis (statistical distribution with 'fat tails') of distribution of individual companies' returns.

I wish someone had shown me those charts earlier.