Stocks for the Long Run? A Handful of Businesses Account for Much of Equity Market Returns

The Lindy Effect: The expected remaining life of an item is proportional to its past life.

“The Lindy effect is one of the most useful, robust, and universal heuristics I know.”
- Nassim Taleb

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

In our last article, we presented the equity market returns as proxied by the S&P 500. We concluded that using U.S. equities as the proxy for equity market returns is incorrect. The primary issue is that proxying overall equity returns via U.S. equity returns is beset by survivorship and lookahead biases. U.S. equities in year 1900 were a much smaller component of the global markets than they are today. As of the date of this article, U.S. equities accounted for nearly 60% of global equity market capitalization. Generalizing from the U.S. relies on the extraordinary success its economy and financial markets enjoyed over the past 100 years, information that is available only in hindsight.

Shifting fortunes of sectors and industries

This leads us to another important risk that investment portfolios comprised of individual equities face. Investors are commonly told that they should buy and hold equities for the long-term. You only have to look at Warren Buffett for the success buy and hold investors can have.

If only it was that easy.