Hendrik Bessembinder’s groundbreaking paper “Do Stocks Outperform Treasury Bills?” is a comprehensive exploration of the long-term performance of US stocks versus Treasury bills1. Published in The Journal of Financial Economics in 2018, the study challenges conventional wisdom and sheds light on the distribution of stock returns over time.
Bessembinder’s research covers a period of almost 90 years, from 1926 to 2016. This extended timeframe allows for a thorough examination of the historical performance of US stocks and Treasury bills. The primary objective of the study is to answer a fundamental question in finance: Do stocks consistently outperform Treasury bills over the long run?
The traditional view in finance has been that stocks offer superior returns compared to less risky assets such as Treasury bills. This perspective is grounded in the notion of a risk premium, which posits that investors should expect higher returns for bearing the additional risk associated with stocks. While this has been true for the broader stock market, it has not been the case for many individual stocks.
One of the key takeaways from Bessembinder’s research is the uneven distribution of stock returns. While it is commonly believed that a small number of high-performing stocks drive the positive returns of the overall market, the reality is even more skewed.
The study reveals that a significant majority of individual stocks failed to outperform Treasury bills.
In fact, Bessembinder found that all wealth created by stocks in excess of Treasury bill returns from 1926 to 2016 could be attributed to a mere 4% of stocks. The other 96% collectively matched one-month Treasury bills2. This finding has profound implications for investors and portfolio managers. It suggests that consistently identifying the few winning stocks among a large pool of underperformers has been a challenge. Most investors would be better served by owning a diversified portfolio of stocks rather than trying to pick the winners. As Jack Bogle said, “Don’t look for the needle in the haystack. Just buy the haystack!”
In summary, Hendrik Bessembinder’s research highlights the challenges in picking winning stocks. This may be discouraging for some market participants, but the good news is that investors can guarantee they own the winners (which largely drive the returns of the overall market) by investing in broadly diversified index funds. In an era where market dynamics and investor behavior continue to evolve, this study constitutes a valuable contribution to our understanding of stock market performance and the associated risks and rewards.
-Ryan Gavin, CFA
Portfolio Manager
