Friday, 9 September 2011

75% of US Shares Lose Value

According to research on the US share market (as represented by the University of Chicago's CRSP total equity market database), between 1980 and 2008, three-quarters of shares lost value; all the market gain (of 10.4%) was due to just 25% of the shares. The study goes a long way toward explaining why most investors and fund managers fail to beat the market average.

So, if you had been in a market tracker you would have made the average market gain. However, if you could have identified those 25% of 'superstocks' (and avoided the 'losers') you would have done a lot better!

 The research comes from Dimensional Fund Advisors in the US, reported in a recent Money magazine article in the US (reported here), in turn picked up by Motley Fool UK. The UK share market probably displayed a similar pattern, although there is no comparable analysis I am aware of.

So, how do you find these Superstocks? Motley Fool suggests that some of the most important characteristics to seek when buying individual shares include:
  • A sustainable competitive advantage that protects the company's profits, be it patents, dominant market share, ownership of natural resources or network effects.
  • A reasonable start price -- if you overpay, it could be as bad as buying a losing business.
  • A management ethos that anticipates and adapts to change.

I like to think the high-yield dividend investing approach targets many of these 'superstocks' but clearly there have also been a fair number of 'not-so-superstocks' on the London market that used to pay good dividends. So I can't claim any magic bullet here.

Some of Dimensional's research is shown here and articles here - worth a rainy afternoon's read (after all, it's free...).


I am not a financial advisor and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.

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