100 years of stock market history shows why picking winners is very difficult

A century of stock market history shows an uncomfortable truth for investors: most companies have not been great investments, while a remarkably small number of winners have generated the bulk of the market’s wealth.

This comes from a research paper on the concentration of wealth creation in the stock market, which has been circulating among fund managers and generating considerable debate and intrigue.

Professor Hendrik Bessembinder of Arizona State University analysed the returns and wealth created by almost 30,000 US-listed stocks between 1926 and 2025.

The headline findings were:

• Almost 60% of the stocks reduced shareholder wealth relative to the return from Treasury bills.
• Of what did make money, 1,082 companies, or 3.7%, accounted for all $90.96 trillion of net shareholder wealth creation, once the wealth destruction from the remaining companies is taken into account.

As Bessembinder puts it, “the favourable overall stock market outcomes are disproportionally attributable to the stellar performance of a relatively few companies”.

The numbers get even narrower more recently though:

• Two stocks had made 10% of all that wealth: Apple and Nvidia.
• From 1926 to 2016, it took 89 companies to generate half of all the net shareholder wealth creation.

The current stock market is a product of this century long trend that only a few companies generate most of the wealth while the rest can actually cost you in the long run, at least, relative to the returns on US Treasuries.

Global stock markets today are extremely concentrated, especially because of the dominance of the US. The mainstage MSCI World index, which is comprised of almost 1,250 names, the top 10 holdings account for 28% of the benchmark, with Nvidia and Apple representing more than a tenth between them.

• Read: The rise of US dominance and risk of concentration

Finding these gems in and among the vast number of investments available is the pursuit of all investors and there’re two tactics for achieving this: cast the net wide and sacrifice owning some of the duds for a greater chance of owning the big hitters. Or, go concentrated and try to only pick the names which will lead the market.

Go as concentrated as the market

Finding tomorrow’s Apple or Nvidia requires a lifetime’s worth of knowledge, dedication, skill and a touch of good fortune, because for all the financial statements you can read there will be unexpected events like wars, and recessions which can steer good returns off course as well as basic human error and biases.

However, this doesn’t deter some active managers from choosing to hunt out what they think will be these few leading names.

One clue that a fund manager is taking a concentrated approach is to look at the number of stocks in the portfolio. Funds holding around 30 to 40 companies can be considered relatively concentrated. Man Income, BlackRock European Dynamic, Fidelity Emerging Markets and WS Lightman European, all members of AJ Bell’s Favourite funds list, all take a selective approach to the market.

One of the mainstays for this investment approach is Scottish Mortgage investment trust, which has been around for over a century, traversing all of the decades Bessembinder analysed.

Although it owns more than 40 names, the trust describes its approach as “seeking the outliers”, attempting to find the handful of companies capable of benefiting from the highly uneven nature of stock market returns.

Its managers highlight previous returns from holdings which have generated vast returns, like Nvidia making 132 times the money invested, Tesla making 32 times and Spotify making 12 times, for example.

But the approach inevitably produces mistakes too, something Scottish Mortgage acknowledges, stating it “will not always get it right, and past portfolios contain real error”.

That neatly illustrates the trade-off with concentration. Getting a handful of big calls right can produce exceptional results, shown by Scottish Mortgage making seven times the return of the FTSE All World index over 10 years and double over five, but getting them wrong can hurt because each investment has a greater influence within a smaller portfolio.

Casting the net wide

The alternative is not to try to predict which handful of companies will dominate the stock market in the decades ahead.

Bessembinder himself says “identifying such stocks in advance is a formidable challenge, to say the least”.

Another of his findings helps explain the problem. While the average lifetime buy-and-hold return was an enormous 30,621%, the median stock lost almost 7%.

Those figures might initially seem contradictory, but they demonstrate how unusual stock market returns can be. A small number of spectacular winners can pull the average upwards even when the experience of the typical company is far less extreme.

This gives diversification its appeal. Because with all the financial theory and gut feeling anyone has, no one, or thing, can predict the market.

An investor owning hundreds or thousands of companies will inevitably own plenty that turn out to be disappointing investments. But they also reduce the danger of completely missing the relatively few companies that go on to generate an outsized proportion of the market’s wealth.

The past 100 years therefore do not provide a formula for identifying the next Apple or Nvidia. Instead, they demonstrate just how difficult that task has historically been, and why owning a broad spread of companies can be valuable when nobody knows in advance where the market’s biggest winners will come from.