“One of the reasons it’s so difficult to outperform the market is because so many individual stocks themselves underperform the market. It’s not a symmetrical distribution where half the stocks outperform and half underperform.
A few years ago Michael Cembalest at JP Morgan performed an extensive study on the Russell 3000 Index, which is a good proxy for the overall U.S. stock market. He found:
- The excess return on the median stock since its inception versus an investment in the Russell 3000 Index was negative 54%.
- Two-thirds of all stocks underperformed versus the Russell 3000 Index from the time they were added to the index. And 40% of all stocks had negative absolute returns, suffering a permanent 70% or more decline from their peak value.
- The percentage of extreme winners in the index was in the single digits, meaning a very small percentage of stocks carried most of the weight for the remaining underperforming stocks.”