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The Equitymaster Research Digest

Two Clear Paths to Outperformance
Sep 9, 2016

You likely aren't familiar with Eric Cettendien and his Longboard funds. But he and his team have come up with a study that I want to share with you today.

Analysing close to 15,000 active stocks and their returns between 1989 and 2015, the study has thrown a startling conclusion.

If you're expecting the returns from so many stocks to form a normal distribution curve, banish the thought. Stock market returns don't come from half the stocks outperforming and the other half underperforming and the investor enjoying a smooth ride.

On the contrary. Indeed, the fat tails at play in the markets may shock you.

According to the study, while around 8% of the stocks managed to outperform the S&P 500 by a massive 500%, another 7% lagged by a similar magnitude i.e. in this case it is the index that outperformed them by 500%.

What about the remaining 85% or so of stocks? Well, they either performed better, at the same level, or worse than the S&P 500.

Here's another staggering statistic: Almost all the gains the S&P 500 logged during this period came from the best performing 20% of the stocks.

In other words, the remaining 80% of the stocks gave investors no return on a collective basis.

It's Pareto's 80:20 rule all over again.

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