Treasury Bills Outperform Most Stocks — Say What???

Treasury Bills Outperform Most Stocks — Say What???

January 26, 2017 Research Insights, $SPY, Active and Passive Investing, Macroeconomics Research
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(Last Updated On: May 22, 2017)

Each morning we peruse a variety of research sites to see if there is anything exciting, new, and intriguing. Rarely does one find something that triggers a knee-jerk reaction like a recent paper by Hendrik Bessembinder.

The title almost FORCES you to read further:

Do Stocks Outperform Treasury Bills?

And the abstract reads like a horror film if you are an equity investor:

stock distribution study

The good professor highlights that the distribution of stock returns is driven by a small percentage of really big winners.

Of course, this finding is not new:

However, Dr. Bessembinder pulls out all the stops and conducts a lot of incredibly interesting research into the details like only an academic writer can do (their job is primarily dedicated to research!).

A few facts/findings over the 1926 to 2015 time horizon:

  • Only 47.7% of all monthly stock returns from the CRSP database (NYSE/AMEX/NASDAQ) are larger than the one-month Treasury rate.
  • 42.1% of common stock holding period returns beat the holding return on T-bills.
  • The 86 top-performing stocks — less 33bps of the entire universe — account for over half of the total wealth created.
  • …and on and on…

My favorite table is the last one, which maps out the top lifetime wealth creators in the US stock market:

top 10 wealth creators

The top 5– Exxon, Apple, GE, Microsoft, and IBM — account for over 10% of lifetime wealth on the entire stock market. The top 15 names account for 16.26% of total wealth EVER created in the US stock market.

Incredible. Dig in.


Do Stocks Outperform Treasury Bills?

  • Hendrik Bessembinder

Fifty eight percent of CRSP common stocks have lifetime holding period returns less than those on one-month Treasuries. The modal lifetime return is -100%. When stated in terms of lifetime dollar wealth creation, the entire net gain in the U.S. stock market since 1926 is attributable to the best-performing four percent of listed stocks, as the other ninety six percent collectively matched one-month Treasury bills. These results highlight the important role of positive skewness in the cross-sectional distribution of stock returns. The skewness arises both because monthly returns are positively skewed and because compounding returns induces skewness. The results help to explain why active strategies, which tend to be poorly diversified, most often underperform.


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Definitions of common statistics used in our analysis are available here (towards the bottom)

References   [ + ]

1. Ben Carlson has a discussion on the results here



About the Author

Wesley R. Gray, Ph.D.

After serving as a Captain in the United States Marine Corps, Dr. Gray earned a PhD, and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management that delivers affordable active exposures for tax-sensitive investors. Dr. Gray has published four books and a number of academic articles. Wes is a regular contributor to multiple industry outlets, to include the following: Wall Street Journal, Forbes, ETF.com, and the CFA Institute. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.


  • This lends new credence to momentum strategies.

    Nick de Peyster
    http://undervaluedstocks.info/

  • Jonathan Seed

    I’m curious on your thoughts of the relationship of this data to the success of strategies employing evidence for long-term (3-5yr) mean reversion in stocks and even ability of equally weighted indices to out-perform vs cap weighted benchmarks. Neither strategy seem to allow for letting your winners run. Is it simply that the “run” is choppy enough to not only accommodate but reward rebalancing?

  • Hey Jon,
    I think the distribution will shift considerably when one starts to sort on certain characteristics — LT mean reversion, value, momentum, etc. The EW vs VW question is also really interesting — Something to investigate in future studies!

  • Mitesh Patel

    Heaton, Polson, and Witte have a related theoretical note on the challenge of picking stocks unconditionally to beat an index:

    https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2910379

    Selecting conditionally, whether systematically with factors (e.g., value, momentum) or preternaturally (e.g., Munger and Buffett), ought to increase the chance of outperformance and decrease the chance of underperformance relative to the index.

  • Adam Kearny

    Wes,
    Doesn’t this support the case for L/S value strategies rather than long-only strategies? Assuming risk and volatility can be managed, your odds of putting together a zero-returning (i.e. costless) short book to fully hedge out your long book are quite good (note Chanos’s short book: Since 1982, zero nominal gains during the greatest secular bull market in history and even with strongly positive Treasury bill yields during most of that run!).
    The problem with long-only strategies (even value strategies) is that a standard retiree/endowment withdrawal model will not survive the 1930s-1940s or the 1970s (in real terms) to materially benefit from and be recouped during the next secular bull market. 1966-1982, stocks went sideways but lost 87% of their purchasing power! Anyone taking out 4-5% a year is too diminished by the time the 1980s/1990s (or 1950s/1960s) comes along.
    Secular bear markets (which we arguably haven’t had since 1968-1974) with no quick snap-back to a new bubble are essentially financial extinction events for long-only investors unless you’re lucky enough to be having John Neff or Warren Buffett running your money in the 1970s! Systematic “Value” of limited help during these periods.

  • There is certainly a compelling case to be made for “glidepath” investors to consider alternatives like L/S in their toolkit. The trick is accessing the exposure that is still a win after-tax, after-fees, etc.