Another data point is obvious: the longer buy-and-hold investors retained their equities, the greater the outperformance relative to Treasury bills. It is about 1% for any one month on average, about 14% for a year, 95% for a decade and a giant 260% for the 29-year sample period.
This isn’t necessarily all bad news for active investors; some of the data could be encouraging or even useful to stock pickers. One revelation might be that active managers should consider focusing less on being stock pickers, and more on being “stock-unpickers” -- in other words, avoiding the dogs. Identifying the characteristics of those 37,195 long-term money-losers -- what quantitative characteristics do they share that could be screened out -- might be useful. This is a common practice for quants, but the sheer number of money-losing stocks makes one wonder if that approach is being fully exploited. If screens could eliminate some of the long-term losers, it might not only improve returns, but could help to justify fees higher than simple indexing.
Others might interpret the study as revealing yet another advantage of indexing: Not only are low costs and beta (market-matching performance) an indexing given, but the research suggests that investors who index broadly may be more likely to hold the rare and outsized winners that drive much of the market gains over time.
This column was provided by Bloomberg News.