Dr. Hendrik Bessembinder Asks the Question, “Do Stocks Outperform Treasury Bills?”

Our lives often seem to be dominated by numbers. Social Security numbers, drivers’ license numbers, account numbers… an unlimited number of 0’s and 1’s residing in thousands of databases, many of which are designed to keep track of our every move. Most of these numbers used to identify us are not necessarily wanted. However, there are some numbers that we do appreciate. Most are earned through hard work. Youngsters may take pride in their grade point average or SAT scores. For adults, numbers tend to be used to measure our individual accomplishments and disappointments.

In June of this year, 31,631 individuals, the most ever, sat down and spent a number of hours taking the CFA Institute’s Level III exam. The Level III exam is the last exam necessary to become a CFA (Chartered Financial Analyst) charterholder. Of the 31,631 candidates, more than 17,000, some 54%, successfully passed. They will become CFAs in October as long as they meet the remaining requirements. I want to welcome all those successful in this academic venture to our club. Like these young students, this is one process that I take a little pride in. My charter is framed and placed on the wall behind my desk so that all can see. My charter number is 18,345, and was given to me in the 31st year of the Institute. Twenty four years later, almost as many CFA candidates will be awarded their charter in a single year than in the first 31 years combined.

Now, on to more important numbers concerning the management of our portfolios. Financial research, including research examining common stocks and bonds, often relies on numbers to answer a question. Dr. Hendrik Bessembinder does so when he asks the question, “Do Stocks Outperform Treasury Bills?” I find most academic papers on finance and investing of limited use in the day to day practice of building and maintaining a portfolio designed for individuals. This is not to say I gain nothing from the time spent reading them, as any addition to my own body of knowledge is beneficial. But applying the research is for the most part impractical. However, some research does stand out, though this could simply be that the research I find most useful is that which reinforces my own beliefs. Bessembinder’s most recent paper is one such piece that reinforces our approach to portfolio management. Bessembinder also tells us, however, that we are quite silly to expect positive results because the probabilities of success are extremely small.

Bessembinder gives us his answer to the question ‘Do stocks outperform treasury bills?’ immediately in the abstract of his paper:

Most common stocks do not. Slightly more than four out of every seven common stocks that have appeared in the CRSP database since 1926 have lifetime buy-and-hold returns, inclusive of reinvested dividends, less than those on one-month Treasuries. When stated in terms of lifetime dollar wealth creation, the entire gain in the U.S. stock market since 1926 is attributable to the best-performing four percent of listed companies.

There is an easy way to apply these findings to your portfolio, assuming they are accurate and the results hold true over the next four or five decades. Anyone who has several decades ahead of them and a goal of creation of wealth through common stocks can just buy shares in an index fund of all U.S. domiciled companies and reinvest the dividends. This will ensure the owning of the four percent of common stocks that produce all the returns.