No, this study won’t tell you how to be a successful investor

A recent MarketWatch article claims a single academic study tells you “everything you need to know about how to be a successful investor.” That is a bold promise. The article summarizes Hendrik Bessembinder’s latest research covering 100 years of U.S. stocks, and the core takeaway is that a few stocks drive stock market returns while the rest barely keep up with Treasury bills. One of the article’s featured commentators goes further and compares stock investing to a lottery and to gambling.

We disagree. The research itself is rigorous and worth reading. The investment conclusions drawn from it in that article are oversimplified at best and misleading at worst. Here is why.

What the study actually found

Bessembinder examined nearly 30,000 U.S. stocks issued between 1926 and 2025. He measured each stock’s lifetime buy-and-hold return and compared aggregate wealth creation against what the same capital would have earned in one-month Treasury bills. The headline finding is that only about 4% of stocks account for the majority of the market’s net wealth creation, while the median stock posted a negative lifetime return. A few stocks drive stock market returns, and the rest barely move the needle.

That result is real. The leap from “most individual stocks underperform over their full lifetime” to “stock picking is a lottery, so buy an index fund” is where the reasoning breaks down.

Problems with the study’s investment conclusions

1) Buy and hold over a stock’s lifetime is an unrealistic benchmark

The study measures what would have happened if you bought a stock the day it was listed and held it until it delisted, merged, or reached the end of the study period. Almost nobody invests that way. The average company in the dataset was only publicly listed for 11.7 years, and many investors hold positions for far shorter periods as they rotate among opportunities.

A company can deliver excellent returns for five or ten years and still show a poor lifetime number. Measuring only the full-lifetime outcome discards the real returns that real investors actually captured. Superior strategies that rotate capital toward better opportunities are not uncommon among disciplined investors.

2) The study understates returns for investors who hold through a merger

When a company gets acquired, CRSP records a final delisting return that captures the takeout premium. That much the study does handle. But the study treats the acquired company as a closed book on the day the deal closes. When the acquirer pays in stock, the original shareholder often continues holding the combined entity for years afterward, and those continued returns belong to the same investment decision. This is a common and realistic strategy.

Think of someone who bought shares of a regional operator that got rolled up into a national competitor, kept the acquirer’s shares, and sold a decade later with substantial additional gains. The study ends the return calculation at the merger date. The investor’s actual experience does not. The result is a dataset that understates the returns available to thoughtful investors who follow businesses through corporate actions.

3) The dataset includes stocks no serious investor would buy

The study analyzes nearly every common stock that ever appeared on the NYSE, AMEX, or NASDAQ since 1926. It applies no filter for market capitalization, profitability, liquidity, or business quality. Roughly 9,000 of the stocks in the original 2018 dataset were delisted with a median lifetime return near negative 92%. Those are not companies a disciplined investor would own.

The problem has grown in recent decades. Public markets now routinely welcome highly speculative issues that would have struggled to go public a generation ago. Biotech is the clearest example. Roughly 150 biotech companies went public during the 2020 to 2021 window, and about a third of 2021 biotech IPOs were preclinical, meaning their lead drug candidates had never been tested in humans. A study of 319 biotech IPOs from 1997 to 2016 found that only four eventually reached $1 billion in revenue; most were characterized by high R&D spending, little revenue, and persistent losses. By the end of 2023, about half of biotech’s 2023 IPO class was trading below its offering price. These companies sit in the Bessembinder dataset alongside mature, profitable, analyzable businesses.

Bucketing speculative lottery-type issuance together with serious operating companies and then concluding that “stock picking is a lottery” is like sampling every restaurant that ever opened in a city, including the ones that closed in six months, and concluding that eating out is a bad idea. A real investor with even basic screening discipline would exclude most of the study’s underperformers before buying a single share.

4) Many investors have horizons much shorter than a century

The study’s framing implicitly assumes a very long horizon. A retiree drawing down a portfolio, a person saving for a home, a business owner managing reserves, and a young professional building wealth all have different time horizons and different goals. Returns over 100 years tell us something about the market as a whole. They tell us much less about what the right strategy is for a specific investor with a specific purpose.

5) Calling the market a lottery misrepresents what stocks are

A lottery ticket has no intrinsic value. It is a random draw against fixed odds. A stock represents partial ownership of a real business with real assets, cash flows, customers, and management decisions. Prices can be volatile in the short term, and not every business succeeds, but the underlying economics are knowable and analyzable.

The skewness Bessembinder documents is not evidence of randomness. It is evidence that a small number of companies compound extraordinary economic value while most fade or fail. That outcome is consistent with how real economies work. Business performance follows a power law because durable competitive advantage is rare. Recognizing and pricing that advantage is exactly what serious equity analysis tries to do. It is not a coin flip.

6) Index funds are not the automatic safe answer

The article presents index funds as the logical response to the study’s findings. But index funds carry their own material risks that the piece glosses over. The top 10 holdings in the S&P 500 now make up roughly 40% of the index, the highest concentration in decades. An investor who believes they own 500 diversified companies actually owns a portfolio where a handful of mega-cap technology names drive most of the performance.

Previous periods of extreme index concentration, including 1980 and the peak of the dot-com bubble, were followed by long stretches of underperformance in the largest stocks. Index funds capture the winners, but they also lock investors into whatever the market is currently overweighting, at whatever valuation the market is currently assigning. That is not diversification in the spirit most investors think they are buying. We have written more on the dangers of index funds separately.

7) “Most investors cannot beat average” assumes everyone is playing the same game

This is the most important objection, and the article glides past it. The claim that most investors cannot outperform the average assumes every investor is trying to maximize the same thing over the same horizon with the same risk tolerance. They are not.

One investor wants steady income. Another wants capital preservation with modest growth. Another is concentrating in a sector they know well from their career. Another is managing a specific tax situation or matching liabilities to a future obligation.

“The market average” is a single number. Investor goals are many numbers. An investor who beats their own objective has succeeded, regardless of whether they beat a broad index over a given stretch. Framing investing as a zero-sum contest against the S&P 500 ignores the diversity of reasons people invest in the first place.

A more useful lesson from the research

Here is what the Bessembinder research actually supports. Long-term returns are highly concentrated in a small number of exceptional businesses. Owning the average company will not generate exceptional wealth. The task of the thoughtful investor is to identify, own, and stay patient with businesses that have a reasonable chance of being among the durable compounders.

That is not a case for giving up and buying the index. It is a case for rigorous business analysis, for concentration when conviction is earned, and for a time horizon that matches the horizon over which great businesses compound. Bessembinder himself notes that for investors with a genuine analytical advantage, the findings support taking meaningful positions in a smaller number of stocks.

How Magnifina approaches this

At Magnifina, we specialize in individual stock investing grounded in business fundamentals and valuation. We do not treat markets as lotteries because they are not. We analyze real businesses, pay attention to what we are paying for each dollar of earnings and cash flow, and construct personalized portfolios around conviction rather than index weightings. This is designed to sidestep the concentration risk baked into cap-weighted indexes and to position clients in businesses we can defend on their merits.

The Bessembinder paper is valuable academic work. It deserves a more thoughtful response than “stock picking is gambling, so give up and index.”

Want to see whether our approach fits your situation? See if we’re a good fit — just 4 questions.