There are some concepts in life that make sense the moment you hear and learn them.
Occam’s Razor. 80/20 rule. Murphy’s Law. Index funds.
Indexing immediately made sense to me. Low costs. Tax efficient. Low turnover. Low maintenance. Simple. And this is very difficult to overcome in the long run (even by professional money managers).
I’ve been investing in index funds for over 20 years. Anything valid for indexing is only obtained if stronger during this time.
My basic expectation was always that index funds would outperform 70-75% of actively managed funds.
SPIVA Scorecard Recent years have shown this rate to be 90% or more for a wide range of stock market styles over 10, 15 and 20 year time frames:
One of the reasons I like index funds is that they are difficult to pick stocks. Indexing allows you to cast a wide enough net to make sure you keep the big winners, which more than offsets the big losers.
I didn’t fully understand how intense the winners’ returns were until I read Hendrik Bessembinder’s work. In 2018 Bessembinder published: Are Stocks Outperforming Treasury Bills?
His research found that over the long term:
- Almost 60 percent of stocks underperform Treasuries.
- Most other stocks only marginally outperform cash.
- About 4% of stocks account for the vast majority of overall gains.
This research was like confirmation bias on steroids for indexers. I knew the stock market was concentrated but I didn’t realize it was This concentrated. This is a big deal for index funds because you automatically own the biggest winners. And these gains tend to be huge.
Bessembinder published an update on his findings last week in a new paper titled . One Hundred Years in the US Stock Exchange. Over the past decade, the stock market’s long-term gains have become more concentrated:
During the 1926-2016 period studied in Bessembinder (2018), 89 firms accounted for half of the $43 trillion in net wealth creation. When the results of the last nine years are included, just 46 companies account for half of the $91 trillion in net wealth created over the entire century.
My new research assistant, Claude, scanned the data from his research to show it more visually.
Let’s take a better look at how markets are trending towards big winners:
It’s almost hard to understand how much money is being created by such a small subset of companies.
Another thing to look at is this based on the percentage of wealth created using the original study and updated figures:
Between 1926 and 2025, just 208 companies created 75% of the wealth in the stock market.
Here’s a breakdown of how many stocks are outpacing Treasuries by 10-year gains:
The win rate over the past 40 years has remained surprisingly steady at around 50%; This means that half of the companies are beating cash, while the other half are not keeping up with the risk-free rate.
Of course, this study A lot long term. Individual stocks can still post gains before eventually falling. Not every investor is a buy-and-hold type. There are other opportunities in between.
And index funds are nothing special. There are other ways to create tax-efficient, long-term investment strategies within a simple, rules-based framework.
I’m not saying indexing is the only way to invest.
But the data shows why index funds are so hard to beat over the long term.
Michael and I discuss Bessembinder’s research, history’s best stocks, and much more in this week’s Animal Spirits video:
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Further Reading:
We debunk the stupid myth “It is a passive bubble”
Now here’s what I’ve been reading lately:
Books:
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