Four years ago Hendrik Bessembinder, a finance professor at the Arziona State University, published a very interesting paper on stock market returns. It showed that despite the tremendous stock market gains over the past century, most stocks are actually duds. In fact, of the roughly 26,000 stocks listed between 1926 and 2016, more than half lost money or did worse than holding one-month treasuries. Yikes!
On the other hand , just 4% of stocks accounted for all the net wealth creation over this time, roughly $35 trillion!
Bessembinder added to his work in 2019 by looking through an international lens. It makes for even more stark reading. About 61% of non US listed stocks underperformed treasury bills in the period 1990 – 2018. And only 1% of stocks accounted for the entire $16 trillion of net wealth created over this period!
If Bessembinder’s work shows anything, it is to be selective! Only a hand full of stocks will help you make money over time. Find those companies and hold on to them for dear life!
I have been leaning towards this approach through my investment journey. Time has taught me to be selective and only invest in the best companies. In the UK markets, that means only having a handful of companies in ones investable universe. And there is great evidence to this. Just look at all the stocks that have gone nowhere over the past 5, 10, and 20 years. Aviva, Barclays, Centrica, Capita, International Consolidated Airlines Grp SA, Vodafone. And that’s just the stocks we can see. They are countless others that have dithered away via bankruptcy. The FTSE 100 is no higher today than it was 20 years ago! That should tell us everything.
That is why you’ll see me buying the same shares over and over again via my monthly stock purchase programme. I know the majority of companies/stocks are trash. There are only a handful of quality companies that create wealth. And when you find those, one needs to buy them at attractive valuations.
One such company is the London Stock Exchange Group (LSEG). Over the last 20 years, it has created immense value for its customers and immense wealth for its shareholders. An investor who bought LSEG shares at IPO in 2011 has 20x their money. It is one of those companies that fit into the 1% of stocks in Bessembinders findings.
It is no surprise then I have been buying shares in LSEG over the past two month as it is trading at a relatively attractive valuation. Yes its share price has underperformed due to the announcement of higher than expected costs following the Refinitiv acquisition. For the long-term investor, however, the company offers a strong competitive position, cash generative economics, and exposure to structural growth opportunities in digital information and analytics (the company now generates c.70% of revenue from its data and analytics services).
For the month of May, LSEG is the only share I bought paying just under £70 for six shares in the company.
Sure it may continue to underperform over the next week, month or year. But over time its value will show up in the share price. I believe over the long term it will comfortably beat the index.