Single-stock risk
Most stocks shrink their shareholders' wealth over time; a handful of companies carry the whole market.
In One Sentence
The stock market's wealth is created by a tiny number of companies; buying individual stocks is betting that you can pick them, while buying the whole market means you don't have to choose.
Why It Matters
Here's what I've learned for myself: explaining the winners after the fact is easy, but spotting them in advance is hard. Companies grow old, too; the largest US companies by market value almost completely turn over within twenty years. If you bet your family's savings on one or two stocks, a single wrong call could hurt your whole family's finances.
One Number
Of the 26,168 US listed companies from 1926 to 2019, 57.8% reduced their shareholders' wealth, while about 0.3% of the companies created half of all the wealth (Bessembinder 2021 · Chapter III).
In the Book
Chapter III uses Bessembinder's research to point out the risk. Chapter V lists it as the first reason to buy only the broad market. Appendix 1 in the Appendix tells how I studied stock picking and eventually gave it up.
Go Further
- Broad-market index ETFs You can't guess who the winners will be, so buy the whole market, and the winners will be in there.
- Active vs. passive Even when professional managers pick the stocks, more than nine in ten trail the market over the long run.
- John Bogle His advice: don't look for the needle in the haystack — just buy the haystack.
- Luck The ordinary people in this book who got rich from a few stocks had plenty of help from luck.