Unpublished Drafts

I wish I didn't have to write this post - I wish someone much smarter had analysed the impact of Bessembinder on the long term buy-and-hold investor but all I find is how it means we should all invest in broad index funds without going in depth with the results or what we can conclude. There are some assesments in the litterature and I will try to make sense of them here but since most are US centric they tend to underestimate costs of diversification. It might be the case that they are right and trying to spend time to asses how it should impact my strategy might very well be what Michael Møller would consider an Ejer Bavnehøj problem - one where initial superficial understanding gives you tools to get 99% value and where spending a significant time optimizing might not give you anything further - though I am obsessive enough to give it a try.

So what does it say?

First of all I'll link the study here and suggest that it really is worth reading for anyone with individual stocks in their portfolio and even more specifically for anyone that are using individual stocks as a proxy to attempt to track market growth (I'm in this camp so far). The study can be found here: Do stocks outperform treasury bills (note that you don't have to sign up to download).

The analysis in the paper is largely based on the CRSP database (which is AFAIK the largest survivorship bias free database of total historical stock returns - how I'd love to get my hands on that) and as such can't be easily replicated by us mere mortals outside of academia. So we'll have to take the conclusions at face value, but can try to understand impact of the methodology on the conclusions in the paper.

The claims in the paper are bold:

• ... the best-performing 4% of listed companies explain the net gain for the entire US stock market since 1926, as other stocks collectively matched Treasury bills.
• ... less than half of monthly CRSP common stock returns are positive. [and in turn] ... the median stock return is negative.
• ... just 42.6% of common stocks [...] have a buy-and-hold return (inclusive of reinvested dividends) that exceeds the return to holding one-month Treasury bills over the matched horizon [full stock lifetime].

To anyone investing in single stocks in order to track the market growth but avoid the costs and inefficiencies of index funds this is of course bad news. It means that most of the stocks you buy are simply gonna be crap and you'll have to rely on luck to catch the winners or at least make sure to diversify much broader than has often been recommended in the past. Note that investing in 20-30 individual large cap stocks is still recommended by Penge og Pensionspanelet in their report here: Anbefalinger om aktieinvesteringer. And this is by authors that I respect greatly, although as they mention the advice in the report is meant for the average Dane where you can argue giving simple advice might be more valuable than giving optimal advice.

Normal returns

It might seem strange that stock returns are so skewed, i.e. only very few having returns larger than treasury bonds when generally we talk about a risk premium on stocks or when observing the highly positive average return. To illustrate why this happens let's see a quick example of how returns compound over time. Say we have an investment with 20%

Example of skewness in random distributions

How do we work with risk

How many stocks are needed

Note 21 side 32. om

Side 8 har eksemplet med negativ median og positivt snit.

Some numbers on page 3: 25,300 companies that issued stocks appearing in the CRSP common stock database since 1926 are collectively responsible for lifetime shareholder wealth creation of nearly $35 trillion, measured as of December 2016. However, just five firms (Exxon Mobile, Apple, Microsoft, General Electric, and International Business Machines) account for 10% of the total wealth creation. The 90 topperforming companies, slightly more than one-third of 1% of the companies that have listed common stock, collectively account for over half of the wealth creation. The 1,092 topperforming companies, slightly more than 4% of the total, account for

Udbytteskat tilbageholdt i hjemland for underliggende aktier kan ikke søges retur.

Front running? Spekulere i at købe aktier så den tipper ind i indekset og så sælge ud igen?

Høje udbytter grundet dansk skattelov (meget højere end udbytter af de underliggende papirer).

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20 year, 15 year, variable rates.

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Taxes are tough

Borrow in assets

Stop saving in retirement when you can coast

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