Tuesday, December 2, 2008

The Capitalism Distribution - The Realities of Individual Common Stock Returns by Eric Crittenden and Cole Wilcox, BlackStar Funds

From World Beta:

The Capitalism Distribution: Fat Tails in Action

Quick, before you read this post, ask yourself these questions:

1. What percentage of stocks beat their benchmark index over their lifetime?

2. What percentage of stocks have a negative return over their lifetime?

3. What percentage of stocks lose essentially all of their value?

Not sure? The answers to all three questions are below. Want to know why a monkey throwing darts is probably as good as your stockbroker? Read on.

I have been hounding the guys at BlackStar Funds to publish their research in a top academic journal for a long time now, but like most money managers, they are too busy conducting research and managing their funds to be concerned with publishing their research.

I have included some of their research in my upcoming book, and thankfully they finally agreed to do a guest post here....
...Key findings:

39% of stocks had a negative lifetime total return
(2 out of every 5 stocks are money losing investments)

18.5% of stocks lost at least 75% of their value
(Nearly 1 out of every 5 stocks is a really bad investment)

64% of stocks underperformed the Russell 3000 during their lifetime
(Most stocks can’t keep up with a diversified index)

A small minority of stocks significantly outperformed their peers
(Capitalism yields a minority of big winners that all have something in common)

In this paper we make the case for the Capitalism Distribution, a non‐normal distribution with very fat tails that suggests a small minority of stocks have been responsible for virtually all the market’s gains while most stocks have been below average investments....MORE