How Many Stocks Succeed?

I’m not sure if you’ve heard, but there is going to be a U.S. presidential election in 2024. And with all of the crazy political news and events over the past month or so, it certainly seems like things are ramping up as we head toward November.

Typically, most people expect the stock market to be extremely volatile during election years simply due to the uncertainty that comes with an election. However, the stock market has not cooperated with people’s expectations so far this year.

The S&P 500 is up over 15% in 2024 alone and has returned nearly 20% since this time last year.

Not only has the market surged, but the ride has been about as smooth as it can be. As I’m writing this, there has only been one day in 2024 when the market has moved more than 2% up or down; that was back in February when it gained 2.1%.

One of the stocks in the S&P 500 helping propel the index to its gains has been Nvidia. As I wrote about a couple of weeks ago, Nvidia’s stock has had a meteoric rise gaining nearly 140% since January.

Nvidia’s recent returns have been so extraordinary that according to a research paper from Hendrik Bessembinder, Nvidia has the highest annualized compound return for any stock with at least 20 years of data at 33.4% per year. In the history of the U.S. stock market, Nvidia’s stock has had the best 20-year performance of any company.

Nvidia literally has been a once-in-a-lifetime stock.

In fact, the stock has performed so well that in a recent poll of Nvidia employees, 75% of employees reported having a net worth of over $1 million. More than 36% of employees reported a net worth of over $20 million.

That’s bonkers.

Of course, most of that net worth is likely tied up in Nvidia stock options which have a restrictive nature and vesting requirements. So it’s not all liquid, spendable wealth and could decline if the stock underperforms in the future.

But I wonder what impact that kind of wealth has on a company? How do you keep employees motivated when they’re already rich? Do you have more turnover from tenured employees leaving to pursue personal passions? I think it’s a fascinating situation.

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So how do you find one of these top-performing stocks like Nvidia?

Well, that’s an exercise that’s far easier said than done.

Going back to the research from Hendrik Bessembinder, he found that just 4% of companies accounted for all of the gains in the U.S. stock market since 1926.

To emphasize this point even further, let’s go back to our high school math class to define the difference between average and median.

The average of a set of data is calculated by adding all of the numbers together and then dividing by the sum of the numbers.

The median of a set of data is calculated by organizing the data from smallest to largest and selecting the middle number.

Dating back to 1926, the average cumulative return of all U.S. listed stocks has been 22,840%. That’s quite a large return.

However, the median stock during this same timeframe had a cumulative return of -7.4%. More than half of all U.S. stocks over the past century have had negative total returns.

To put the data into plain English, the majority of stocks will lose money over time but the very few best performers more than pick up the slack.

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So what’s the lesson?

It is incredibly hard to pick and choose what will be the best-performing stocks because there are so few of them. Again, most stocks lose money over time.

Owning a diversified basket of stocks ensures that you have those top-performing stocks in your portfolio which gives you the best chance of building wealth over time.

One last data point I want to share from the research is that the 17 highest-returning stocks gained more than 5 million percent since 1926. You read that right, 5,000,000%.

What’s interesting is the average annual return across the 17 companies was a modest 13.5%. There are no stocks with crazy 30% annual returns sustained over multiple decades.

“Average returns sustained for an above-average period of time leads to extraordinary results.” — Morgan Housel

Thanks for reading!

Jake Elm, CFP® is a financial advisor at Dentist Advisors. Jake a graduate of Utah Valley University’s nationally ranked Personal Financial Planning program. As a financial advisor at Dentist Advisors, he provides dentists with fiduciary guidance related to investments, debt, savings, taxes, and insurance. Learn more about Jake.