Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 571

The tortoise wins in investing

There aren’t too many must-reads in the investment world, but UBS’ Global Investment Returns Yearbook (formerly Credit Suisse) is among them. In it, a trio of academics – Ellroy Dimson, Paul Marsh, and Mike Staunton - dig deep into historical data and uncover key long-term trends, often at odds with current investment thinking. The latest publication, out earlier this year, hasn’t received the attention it should as it ties in with other, just-released research, that debunks the long-held notion that taking greater risks in markets equates to higher returns. If right, it has ramifications for how investors should allocate assets for their portfolios.

Questioning Markowitz’s Modern Portfolio Theory

In 1952, Harry Markowitz put forward a theory that would revolutionise finance. His Modern Portfolio Theory (MPT) said that taking more risk would reward you with a higher expected return. Markowitz later won a Nobel Prize for MPT, and it’s framed how financial advisers and investment managers put portfolios together to this day.

There’s now enough evidence to show that it’s wrong. There’s been plenty of research questioning the theory, though the UBS Yearbook should prove the exclamation mark that puts MPT to bed.

Specifically, the Yearbook looks at volatility across US stocks since 1963 and UK stocks since 1984. Volatility is the rate at which the price of a stock increases or decreases over a period. If the price of a stock fluctuates wildly in a short period, hitting new highs and lows, it’s said to have high volatility. If the stock price moves higher or lower slowly, or stays relatively stable, it’s said to have low volatility. Higher stock price volatility often means higher risk and helps an investor to estimate the fluctuations that may happen in the future. The UBS Yearbook orders the US and UK stocks by volatility and calculates how shares with low, medium and high volatility performed.

The study reveals that for low and medium volatility shares, returns are clustered. That means volatility is shown to have little effect on returns. For high volatility stocks, the results are more striking. They reveal that these stocks dramatically unperformed the rest. In other words, investors haven’t been rewarded for putting money into stocks with high volatility; they’ve been punished.

Old and boring industries beat the new and shiny

The latest UBS research builds on their earlier, better-known work on whether it’s better to invest in new industries, often characterized by higher volatility and risk, or older, more seasoned sectors. Its 2015 study examined the rise and fall of industries in the US and UK since 1900.

It found that though new industries and companies have transformed the world, they’ve often been disappointing investments. Why? Because, historically, there’s been a tendency for the market to overvalue new industries and technologies. Part of the issue is that new industries are often born on a wave of IPO activity. And numerous studies show that the post-IPO performance of stocks around the world is poor.

On the flip side, markets have tended to undervalue older industries, and that’s resulted in superior performance over time, as the below chart attests.

It might surprise some that tobacco is the best performing industry in the US since 1900. US$1 invested in the sector back then turned into US$6.28 million in 2015. Not bad for an industry where volumes peaked in the 1960s.

Other unglamorous sectors such as electrical equipment, food and rail have also handily beaten the market. Rail is also a fascinating case study given it was the new technology of the late 19th century and had a prolonged decline soon after, though the last 30 years has seen a resurgence in the sector.

The UK has different sectors at the top of the performance rankings than the US.

Notice how alcohol, part of the ‘sin’ industries including tobacco, is the best performing sector in the UK since 1900. It’s followed by chemicals, insurance, and, surprisingly, shipping.

The 2015 study also outlines the performance of stocks based on their degree of so-called ‘seasoning’ – the length of time they’ve been listed since their IPO. It found that over a 35-year period, terminal wealth was almost 3x higher for the most seasoned stocks over the least seasoned. In other words, older stocks on average substantially outperformed newer ones.

Finally, the research tested value and momentum investment strategies that leaned into older industries and stocks against newer ones and found that they would have historically delivered superior returns.

Bessembinder’s best stocks ever

The UBS findings tie into just-released work from renowned finance academic, Hendrik Bessembinder. Bessembinder has become famous, at least in investing circles, for his pioneering work into how very few stocks have historically accounted for the overwhelming majority of market returns.

“Focusing on aggregate shareholder outcomes, we find that the top-performing 2.4% of firms account for all of the $US75.7 trillion in net global stock market wealth creation from 1990 to December 2020. Outside the US, 1.41% of firms account for the $US30.7 trillion in net wealth creation.”
- Hendrik Bessembinder and colleagues, Financial Analysts Journal, revised March 2023.

In his latest work, Bessembinder drills down into which specific stocks have performed best in the long-term. Can you take a guess as to which stock has had the highest cumulative returns in the US since 1925? You may have got a clue from the UBS study because the answer is Altria, the tobacco company. US$1 invested in Altria in 1925 turned into US$2.66 million by the end of last year. That’s a compound annual growth rate of 16.29%.

Other stocks with impressive returns include Vulcan Materials (construction materials) Kansas City Southern (rail) General Dynamics (aerospace, defence), and Boeing (aerospace).


Source: Henrick Bessembinder, ‘Which US stocks generated the highest long-term returns’

The top five best performing stocks aren’t exactly in sexy industries. Does that mean the mundane beats the new? Bessembinder says yes and no. His study goes on to list the stocks more than 20 years old which have delivered the best annual returns, as opposed to cumulative returns. Topping this list is none other than the hottest company of the moment, Nvidia, closely followed by other technology companies such as Netflix and Amazon.


Source: Henrick Bessembinder, ‘Which US stocks generated the highest long-term returns’

Note how much higher the annual returns of the likes of Nvidia are (33%) compared to Altria in the previous table (16%).

It’s also worth mentioning though how many non-tech companies are in this second list too, including homebuilders (NVR), broadcasters (Lin and Time Warner), pool suppliers (Pool Corp) and healthcare companies (UnitedHealth, Express Scripts).

Key takeaways

Here are some key takeaways from these studies:

  • It’s time in the market rather than market timing that counts. As Altria demonstrates, compounding returns at 16% per annum generates mind-boggling wealth in the long-term, and even lower returns can still deliver satisfactory outcomes.
  • The UBS study shows that investors tend to overvalue newer industries and stocks and undervalues older ones. It’s not always the case, but that can pave the way for compelling investment opportunities.
  • The studies neglect to mention something critical – how important industry structure is to stock returns. I don’t think it’s an accident that tobacco has been such a fruitful sector given the massive consolidation that’s happened in the sector over the past 50 years, and the pricing power that it has given companies in the face of declining volumes. The same goes for the rail industry, where volumes have been flat for a long time, yet many companies have generated incredible returns over the past 30 years thanks to consolidation, pricing power, and streamlined cost structures. Put simply, favourable industry structures can allow some companies to bypass competitive threats and avoid the ‘creative destruction’ that happens to the majority of the market.

 

James Gruber is Editor at Firstlinks.

 

19 Comments
JanH
September 10, 2024

I wish these articles would focus on the ASX. The tax headaches with investing in US shares is a strong deterrent for those who like to Keep It Simple. I attended a lunchtime seminar at Melbourne Stock Exchange many moons ago. I never forgot the key lesson: the incredible power of compounding. I have done very well out of Australian shares. I agree with another of the FirstLinks' articles re buying shares with dividends. I would add fully-franked dividends, and reinvesting dividends. And being in it for the long haul - 60 plus years. Yes, we have had some crashes, the GFC the scariest. Many thought that was the end of Capitalism but a year and a bit later, the market was on the rise again in line with the long-term trend. And so far, this has been the pattern even after Covid crash, etc etc. As they say: "the trend is your friend" And citing Buffett-- oh, no, not again-- be greedy when others are fearful and vice versa. My motto: Don't Panic. That applies to FOMO as much as FOLE (Fear of Losing Everything). Finally, it is very hard to time the market accurately. And all graphs report historical data, not the future. What's that about the Tortoise: Slow and steady wins the race!

Josh
August 05, 2024

I’m not sure that looking at this since 1900 is the right way to do it, because no one remains invested for 124 years, and not do we even live for 124 years.
What point is analysis that we can’t replicate?
Academically interesting? Yes.
Practical and helpful? No.

The Nasdaq has outperformed the S&P500 by some 2-3x and outperformed the All Ords by perhaps 4-5x (I don’t have exact numbers infront of me but have done previous calculations on this. Happy to be corrected here if I’m off.).

This is analysis which is both interest and practical and helpful.
Do we think the future will be more digital than today with a greater reliance on technology? Almost certainly “Yes.”

Had the Nasdaq and technology outperformed over a realistic investment horizon within our lifetime? “Yes”.

No need to make it too complicated. Stay invested in tech and sell when you need some cashflow.

Steve
August 04, 2024

Can someone do an article on the new BetaShares ETF, Global Cash Flow Kings (CFLO)?
It intrigues me, whether it is a goer or not.

Mark Hayden
August 03, 2024

Thanks James, you have referred to excellent studies about long-term investing. A key aspect that I want to address is - these reports show that with hindsight we can see that some businesses out-perform; now, can they be selected in advance, noting a planned long-term, patient approach?

James Gruber
August 05, 2024

Hi Mark,

It's the key question. I think Hendrik Bessembinder sums it up well in a recent interview:

"Being trained as an economist, I can’t divorce myself from the economist’s worldview. In my mind, one of the most important ideas from economics is comparative advantage. What are you good at? Core competency might be the way more management gurus come after the same idea. For the vast majority of investors, picking stocks is not your comparative advantage. You got a day job. That is your comparative advantage. If you don’t have a comparative advantage in stock picking, diversification was always great advice for you, and now you’ve got some new ammunition. Because what I’ve shown is that if you just pick a few stocks at random without knowing anything, the odds are heavily skewed towards you’re underperforming the market."

Kevin
August 05, 2024

Common sense Mark.For some reason exponential growth ( compounding ) just doesn't seem to click.There are no secrets,there isn't a secret sauce,nobody can predict the future .All people can do is deny the past .

Last big purchase was MQG,then it was MQB ticker. 1,000 shares cost ~50K.they went up to around $80 or $90 each .Then they crashed during the GFC to around $18. If anybody knew that they would be ~ $200 now you would remortgage the house, borrow everything you could and buy them.Then you would need to do what for some strange reason is impossible,sit down,do nothing,just wait for 19 to 20 years.

Tomorrow it all changes,as the price changes .Human nature doesn't change.Every day is the same,you can't do that!. Concentration risk, etc etc etc . We know exactly what happened from 2005 up to 4.10 pm tomorrow.The stock price went up from ~ $50 to ?. If you reinvested the dividends you'd have ~ 2400 shares if you bought 1,000.People are still going to deny it,you must get it precisely wrong to 3 decimal places.No diversification or $ cost averaging,you can't do that!!!.

If you are young enough then make a note of the MQG price at 4.10 pm tomorrow.The book full of hypotheticals,what ifs and look over there's will be repeated every day for the next 20 years . You must read this article in the paper,it predicts the future .You must read this book,it predicts the future.You must listen to Matthew,Mark,Luke and John. Then Janet ,Julie,Jane and Jemima also said they thought that too,so it must be true. They will all be wrong,and when we know what happened 20 years from tomorrow ,they'll still be saying you can't do that !!!!.

Nobody can afford to buy a house today Nobody could afford to buy a house 20 years ago.Nobody will be able to afford to buy a house in 2044.I think that if they tried,they can afford to buy a house

Dudley
August 05, 2024

"No diversification or $ cost averaging,you can't do that!!!.":

Well anyone can. The outcome is not known in advance.

Should they have a time machine to enable placing bets from 1926 on random USA shares, the consequence is 58% will lose relative to USA Treasury bills and "42% have a lifetime holding period return higher than the one-month Treasury bill rate over the same time period".

Had the time traveller consistently picked one share each year which provided a 20% return, each initial $1 would have, ignoring taxes and costs, compounded to:
= 1.2 ^ (2024 - 1926)
= $57,512,482
and now be aged at least 98.

Kevin
August 05, 2024

Ticker was MBL back then. Checking annual reports then on 31/3 2005 the closing price of MBL was $48.03.Call it $50,and you used your line of credit on a house to buy 1,000 of them ,$50K.Timing.

One year later they closed at $64.68,same thing $65K to buy 1000. Time in the market. For macbank that is normal.They are volatile.

Compound them @12% for 18 and 19 years $50K is $430K. $65K is ~ $500K.Completely wrong,The person that bought @ $50 had one extra year in the DRP,so ~ 50 shares more than the person that bought @$65.

The market turns up every day to offer a buy or sell price.

The crowd turn up every day to say you can't do that!!!.

The pantomime mathematicians turn up every day to tell you you need to get it precisely wrong to 3 decimals.

Those very wise words,simple but not easy.

They'll turn up every day to show how they don't understand exponential growth. 125 years from today you'll be dead .You may or may not have great great grandchildren that have no idea who you are or were. If Mac Bank is still there and you spent $20K today to buy a hundred of them and compound that at 10% for 125 years the number will be huge.

In 125 years time they'll still be saying the same thing,you can't do that,why would you let something compound for 125 years,you'll be dead.

Every day for the next 125 years,nobody will be able to afford to buy a house .

Westpac has been there for 207 years now.Nobody could afford to buy a house back then. Nobody could plan ahead 207 years back then.Nobody ( virtually ) has bought them across that 207 years.The shareholder breakdown in the annual report will tell you that.

207 years of you can't do that!!!!!;.
Maths is useless,compound them both

Dudley
August 03, 2024

"It’s time in the market rather than market timing that counts.":

Who knows how much time they have left in the market?

If it is guessed 'not long to go' and amount available to spend is:
. Superfluous; do whatever - does not matter.
. Enough; taking risks is pointless.
. Insufficient; desperate gambles.

Otherwise, gambling on shares is for those with several market 'cycles' ahead. 40 years?
Annual compounding eventually makes losses, in real terms, due to 'volatility' a small probability.
Unless a 100x bagger is bagged.

Harry
August 04, 2024

Shares are not gambling if you’re investing. If you’re a trader, then you better be good when you go up against the pros. If you’re investing just diversify and ride on the business progress and growing wealth of humanity. If humanity goes belly up. Nothing will matter anyway.
Time in the market is fabulous advice for our young. My kids in their 20’s have stockbroking accounts. They get money deposited Avery birthday and every Xmas. Dividends are reinvested. Time will take care of them.
My father did the same for me when I was 20.
If you want to me avoid risk, then put your money in a bank account and collect interest. You’ll lose every time, no risk at all of any other outcome,

Dudley
August 05, 2024

"Shares are not gambling if you’re investing.":

Investing is the moment when you put your money in someone else's vest.

Gambling is leaving it there when you don't have a legally enforceable contract for that someone else to return the initial in-vest-ment plus profit / interest at nominated time(s) or condition(s) and merely hope that said someone else does not 'trouser' the purported investment.

Kevin
August 02, 2024

Investing really is boring .You just keep doing the same thing over and over .Take the occasional break to watch paint dry for excitement and thrills.Listening to people saying you can't do gives a bit of excitement too.

I wonder why BRK and Wal mart aren't in these lists.BRK I can perhaps understand,Wal mart always seems to be completely overlooked, From 1971 to the present day CAGR of ~ 21% without reinvesting dividends.Doing nothing at all just never seems to be complicated enough for people.

A good book is ( was) S + P,the dividend rich investor,I don't know if it has been reprinted. I read it in the mid 1990s,a list of US companies that had paid out dividends for 50? years and longer,most years the dividends increased I think . I'll have to have a look on Amazon etc to see if has been brought up to date and reprinted.

The difference for time in and timing, CBA peaked 2016? @$96. 18 months or two years later they are down to around $72. I bought,I think they had a capital raising for tier one capital ratios requirements.I think I bought on market and the capital raising,but perhaps just the capital raising. Buying at either price wouldn't really matter if you plan on 30 years of constant dividend reinvestment.Should they turn bad,sell them. The cherry picked data of course will be everybody bought at the top of the market,CBA are a disaster waiting to happen.

And a thanks to Graham and Peter for that $#@@# podcast,the boot up the arts to get me back on the pitch for a month or two of white line fever ,it was good fun. Feb 2022,WES @ $51, CBA ~ $93, a CSL capital raising at $253,they are still going down,I'll watch them and average down @$240.Panic they are at $242,buy,they might not get down to $240.

APA did rise as they thought might happen.Still got them on the top up I bought when I hadn't noticed they had gone down to ~ $8.50.They just seem to increase the dividend by around 2 cents every year.

Cold,wet ,bored.Bike time in an hour or two hopefully

Pip
August 03, 2024

Is this the book Kevin? It is still available on Amazon. It even mentions the tortoise!!


The Dividend Rich Investor: Building Wealth With High-Quality, Divident-Paying Stocks Hardcover – 22 November 1996
by Joseph Tigue (Author), Joseph Lisanti (Author)
3.6 3.6 out of 5 stars 7 ratings
Edition: 1st
See all formats and editions
Smart investors know that the safest way to build wealth is to buy stocks that consistently pay dividends. Now Standard & Poor's the nation's leading securities information company, has distilled this sound investment philosophy in "The dividend rich investor". This user-friendly guide: shows why dividends are important part of the investment equation; tells what to look for in a dividend-paying stock; provides a valuable list of stocks showing dividend leaders; and includes a free trial subscription to The outlook, S&P's weekly investment newsletter.#FDEIn addition, insider interviews with famous investors who use dividends-based stock picking, corroborate the book's prudent investing philosophy that the tortoise investor (seeking total return, the combination of dividends and appreciation) will beat the hare (aggressive growth) investor over time.

Kevin
August 05, 2024

Thanks,I had a look at it.,that's the book.

Pip
August 01, 2024

Thanks James, Welcome back. I'm very grateful for your articles. But I'm confused. You say "It’s time in the market rather than market timing that counts." But in your editorial you seem to be saying that now is not the time to be buying the magnificent 7 in the USA. So timing does matter? And you also say "very few stocks have historically accounted for the overwhelming majority of market returns." So, which stocks you buy is also critical? Also, I would like you to plot your two "Long run performance" graphs starting in 1910 and see how it changes the results for some sectors. (Timing does matter?)

James Gruber
August 02, 2024

Hi Pip,


Thanks for the feedback.


Both time in the market and timing matter to a degree, though I'd suggest the former is far more important. If you buy a stock at 30x versus one at 10x and they both grow earnings at the same rate, buying at 10x is likely to yield greater returns. You'll also have a 'margin of safety' if the stock doesn't turn out as expected.


And, yes, what stocks you buy does matter. Hendrik Bessembinder, quoted in the editorial, advocates buying an index ETF in order to capture the few stocks that outperform in the long term. Alternatively, you need to identify some of these 'outperformers' in advance. Best, James

Dudley
August 03, 2024

"Hendrik Bessembinder, quoted in the editorial, advocates buying an index ETF in order to capture the few stocks that outperform in the long term.":

Long-Term Shareholder Returns: Evidence from 64,000 Global Stocks
Hendrik Bessembinder
W.P. Carey School of Business
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3710251

'The results obtained here are also relevant to the debate regarding the selection of relatively
narrow portfolios vs. the passive holding of broadly diversified portfolios. The results here confirm in a
global sample that the wealth created by stock market investing is largely attributable to extreme positive
outcomes to a relatively few stocks. We report that the modal long-horizon return to individual stocks
involves a complete or near-complete loss of capital. However, the prospect of some -100% returns may
not be as daunting in light of the documented frequency with which longer-term returns to individual
stocks exceed benchmarks such as 1,000%.6 That is, the results here highlight the magnitude of the
potential gains to a long-horizon investor with a comparative advantage in identifying ex ante those
stocks that will generate large long-run returns, even while they also illustrate how the odds of
underperformance loom large for an investor who selects a narrow portfolio in the absence of such a
comparative advantage. Of course, our study does not clarify which, if any, investors possess the
requisite comparative advantage.'

Dudley
August 03, 2024

A nest of relevant articles here:

Do stocks outperform Treasury bills?
https://wpcarey.asu.edu/department-finance/faculty-research/do-stocks-outperform-treasury-bills

Example:

Needles in a stock picker’s haystack: Can you find the 4%?
https://www.huffingtonpost.com/entry/needles-in-a-stock-pickers-haystack-can-you-find_us_59568425e4b0326c0a8d0fe0

'Of the 26,000 stocks that have appeared on the Center for Research in Security Prices (CRSP) database since 1926, less than half have generated a positive return, and only 42% have a lifetime holding period return higher than the one-month Treasury bill rate over the same time period.'

'less than four percent [4%] of stocks account for all of the net stock market gains over the ninety year period covered by the study'

'buying and holding individual stocks like Berkshire Hathaway and amassing a fortune is the exception rather than the norm. The lesson for investors is that selecting individual stocks is a bit like buying lottery tickets – winners have big payoffs.'

SGN
August 01, 2024

"It’s time in the market rather than market timing that counts.”
That is old and proven concept surely works for my style of investing for individual shares and ETF.

 

Leave a Comment:

     

RELATED ARTICLES

4 ASX small caps poised for a big year

Four all-time best charts for every adviser and investor

Three all-time best tables for every adviser and investor

banner

Most viewed in recent weeks

The nuts and bolts of family trusts

There are well over 800,000 family trusts in Australia, controlling more than $3 trillion of assets. Here's a guide on whether a family trust may have a place in your individual investment strategy.

Welcome to Firstlinks Edition 581 with weekend update

A recent industry event made me realise that a 30 year old investing trend could still have serious legs. Could it eventually pose a threat to two of Australia's biggest companies?

  • 10 October 2024

Welcome to Firstlinks Edition 583 with weekend update

Investing guru Howard Marks says he had two epiphanies while visiting Australia recently: the two major asset classes aren’t what you think they are, and one key decision matters above all else when building portfolios.

  • 24 October 2024

Warren Buffett is preparing for a bear market. Should you?

Berkshire Hathaway’s third quarter earnings update reveals Buffett is selling stocks and building record cash reserves. Here’s a look at his track record in calling market tops and whether you should follow his lead and dial down risk.

Preserving wealth through generations is hard

How have so many wealthy families through history managed to squander their fortunes? This looks at the lessons from these families and offers several solutions to making and keeping money over the long-term.

A big win for bank customers against scammers

A recent ruling from The Australian Financial Complaints Authority may herald a new era for financial scams. For the first time, a bank is being forced to reimburse a customer for the amount they were scammed.

Latest Updates

Property

Coalition's super for housing plan is better than it looks

Housing affordability is shaping up as a major topic as we head toward the next federal election. The Coalition's proposal to allow home buyers to dip into their superannuation has merit, though misses one key feature.

Planning

Avoiding wealth transfer pitfalls

Australia is in the early throes of an intergenerational wealth transfer worth an estimated $3.5 trillion. Here's a case study highlighting some of the challenges with transferring wealth between generations.

Retirement

More people want to delay retirement and continue working

A new survey suggests that most people aged 50 or over don't intend to stop work completely when they reach retirement age. And a significant proportion of those who delay retirement do so for non-financial reasons.

Economy

US debt, the weak AUD and the role of super funds

The more the US needs capital and funding, the higher its currency goes. For Australia, this has become a significant problem as the US draws our capital to sustain its growth, putting pressure on our economy and the Aussie dollar.

Investment strategies

America eats the world

As the S&P 500 rips to new highs, the US now accounts for a staggering two-thirds of the world equity index. This looks at how America came to dwarf other markets, and what could change to slow or halt its momentum.

Gold

What's next for gold?

Despite a recent pullback, gold has been one of the best performing assets this year. What are the key factors behind the rise and what's needed for the bull market in the yellow metal to continue?

Taxation

Consulting on the side? Don't fall into these tax traps

Consultants must be aware of the risks of Personal Service Income rules applying to their income. Especially if they want to split their income or work through a company.

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.