You're absolutely right about the nano or micro caps, they certainly play a role in this.
And thanks for pointing out the equal-weighted indices. They've had a tough time in recent years, but over certain periods through history, they've definitely done better.
No doubt that sticking to S&P 500 stocks only would imply a much higher median return than the near-zero that Bessembinder found for all stocks.
Yes I think most people underestimate the amount of small public companies there are out there.
For ~2,200 companies listed on NYSE, there are ~3,500 on Nasdaq (including lots of small biotech) and ~10,000 on pink sheets.
It's the same in Canada where there are about 5,000 companies listed and a ton are junior mining or oil exploration stocks. Vast majority of them won't make it and it will lead to the statistics shown in the post.
Also, the fact that only a few hundred big companies are measured in an index is itself a distortion of how listed corporations perform. In Britain, the main index only charts 100 firms. Ridiculous.
So MarketFighter, if stock market indices weren't rigged, your lead over them would be even bigger wouldn't it? What's the long term performance gap between the S&P500 *median* return and your strategy's return?
I wouldn't say that indices are rigged, but I get your point :) They're just momentum-optimized in a systematic way that provides a better return than the typical/median stock.
Unfortunately, I haven't found any data for the median S&P 500 stock. I'm sure, though, that it's higher than the 0% found for the full market median stock, but lower than the 9–10% for the S&P 500. In comparison, the 20 year CAGR for the strategy is around 18%.
Broad ETFs should be the foundation of everyone's portfolio. Then, we can allocate a bit of money to individual stocks. Nothing wrong with that as long as position sizing is right.
I agree. It just took me a lot of years to reach this conclusion 😄 I believe overconfidence is the biggest challenge for most people. It was for me at least.
Personally, my mindset is set on probabilities found in data. Following this approach, index investing has a higher expected return than industry-ETFs or funds selected through discretionary analysis based on anyone’s individual bullishness (sorry! :)).
Research shows that theme-based ETFs tend to significantly underperform the broad market in the long run. The same goes for stock pickers.
That being said, some names will of course outperform, but I believe it's very hard to guess which ones :)
To be fair, I would say there's less room for biased decisions when picking individual stocks than for a full sector ETF. But personally, I would not rely on my own ability to "predict" the winners, which is why I follow a system :)
The overconfidence/Dunning–Kruger thing would still bite you on the bum. And if you're not using the MarketFighter strategy, you're losing its best aspect, namely its ability to predict market momentum, which sits on top of industrial/economic momentum and magnifies it.
OK, sometimes market momentum is not sitting on top of industrial/economic momentum, it just thinks it is, but it still makes waves.
This is heavily skewed by tons of nano-small caps that go under and never make it.
When you look at the S&P 500 vs its equally weighted equivalent, the numbers are far from being that dramatic.
The longest running S&P 500 etf $RSP has returned a CAGR of 11.1% since inception in 2003.
The S&P 500 was dominated by mega-cap Mag7 during that period and returned a CAGR 11.5%
You're absolutely right about the nano or micro caps, they certainly play a role in this.
And thanks for pointing out the equal-weighted indices. They've had a tough time in recent years, but over certain periods through history, they've definitely done better.
No doubt that sticking to S&P 500 stocks only would imply a much higher median return than the near-zero that Bessembinder found for all stocks.
Yes I think most people underestimate the amount of small public companies there are out there.
For ~2,200 companies listed on NYSE, there are ~3,500 on Nasdaq (including lots of small biotech) and ~10,000 on pink sheets.
It's the same in Canada where there are about 5,000 companies listed and a ton are junior mining or oil exploration stocks. Vast majority of them won't make it and it will lead to the statistics shown in the post.
Own selective winners while research still cuts noise.
Yes, that’s the ideal. 👍 The difficult part is finding a way to systematically identify those winners with a satisfying level of consistency.
Also, the fact that only a few hundred big companies are measured in an index is itself a distortion of how listed corporations perform. In Britain, the main index only charts 100 firms. Ridiculous.
I agree, most indices do not represent stocks in general but rather large caps or even mega caps in particular 😊
So MarketFighter, if stock market indices weren't rigged, your lead over them would be even bigger wouldn't it? What's the long term performance gap between the S&P500 *median* return and your strategy's return?
I wouldn't say that indices are rigged, but I get your point :) They're just momentum-optimized in a systematic way that provides a better return than the typical/median stock.
Unfortunately, I haven't found any data for the median S&P 500 stock. I'm sure, though, that it's higher than the 0% found for the full market median stock, but lower than the 9–10% for the S&P 500. In comparison, the 20 year CAGR for the strategy is around 18%.
Thanks for this article :)
Interesting because for most things median is more useful than mean - clearly not in this scenario!
You're absolutely right :) In this case, understanding the difference between the two means everything, and I felt this was an overlooked aspect.
An insightful article, many thanks
Glad you liked it, thanks for your comment!
Great article, thanks.
Thanks, I’m glad you like it. :)
Broad ETFs should be the foundation of everyone's portfolio. Then, we can allocate a bit of money to individual stocks. Nothing wrong with that as long as position sizing is right.
I agree. It just took me a lot of years to reach this conclusion 😄 I believe overconfidence is the biggest challenge for most people. It was for me at least.
Thanks for the question.
Personally, my mindset is set on probabilities found in data. Following this approach, index investing has a higher expected return than industry-ETFs or funds selected through discretionary analysis based on anyone’s individual bullishness (sorry! :)).
Research shows that theme-based ETFs tend to significantly underperform the broad market in the long run. The same goes for stock pickers.
That being said, some names will of course outperform, but I believe it's very hard to guess which ones :)
To be fair, I would say there's less room for biased decisions when picking individual stocks than for a full sector ETF. But personally, I would not rely on my own ability to "predict" the winners, which is why I follow a system :)
The overconfidence/Dunning–Kruger thing would still bite you on the bum. And if you're not using the MarketFighter strategy, you're losing its best aspect, namely its ability to predict market momentum, which sits on top of industrial/economic momentum and magnifies it.
OK, sometimes market momentum is not sitting on top of industrial/economic momentum, it just thinks it is, but it still makes waves.