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Published: February 21, 2025
Most people assume that investing in individual stocks is a surefire way to grow wealth over time. But stock market history tells a very different story.
A fascinating new research paper by Hendrik Bessembinder ↗ (Arizona State University) analyzing nearly a century of stock market data tells a very different story: more than half of all publicly traded stocks lost money over their lifetime. And yet, the overall market thrived—thanks to a tiny subset of superstar stocks that generated massive returns.
Key Takeaways
- Most stocks fail: Over 98 years of data show that more than half had negative returns, proving diversification is key.
- A few stocks drive the market: A small handful account for most gains, favoring index investing.
- Long-term investing wins: The best stocks succeed over decades, proving time in the market beats timing the market.
The Heavy Lifters: How a Few Stocks Drive Market Returns
According to Bessembinder’s study, 51.6% of 29,078 stocks from December 1925 to December 2023 had negative cumulative returns. In other words, if you randomly picked a stock in 1925 and held onto it, the odds were worse than a coin flip that it would actually make you money. So how did the market still manage to grow exponentially over the decades? A select few companies generated outsized returns that more than compensated for the failures.
Stock market history shows that 30 stocks delivered cumulative returns greater than 2.4 million percent, with Altria Group (formerly Philip Morris) topping the list at an incredible 265 million percent—this represents a compound annual growth rate (CAGR) of 16.29% since the end of 1925. That means an investor who put just $1 into Altria back in 1925 and reinvested dividends would have over $2.65 million today!
Now, with a few exceptions, you’d be hard-pressed to find individuals who have held onto Altria stock for 100 years—although some institutional investors might have—but that’s not the point. The takeaway is that the stock market’s gains have been largely fueled by a tiny group of outliers.
Other stocks within this select 30 include household names like Boeing, Coca Cola, Hershey, Kroger, and Walgreens. However, this is not to suggest that these 30 stocks are investment-worthy today since market conditions decades ago are not the same as they are today.
For example, Altria has made most of their revenue on the sales of tobacco-based products, which have experienced an annual decline in consumption every year for the past 10 years.
The Harsh Reality: Most Stocks Underperform
For every Altria, there are thousands of stocks that flopped. The median stock return over time was actually negative. This reinforces a painful reality: most companies simply don’t stand the test of time. Some go bankrupt, others get acquired, and many just stagnate. Even among stocks that lasted over 20 years, a quarter of them still posted negative returns.
Short-lived stocks fared even worse. Stocks that were in the market for five years or less had a mean annualized return of -19.8%. The data makes it clear—while a few companies become giants, the majority of stocks are, at best, mediocre investments, and at worst, money-losers.
The Venture Capital Analogy: Betting on the Few
Living in California, I’ve paid particular attention to the venture capitalists (VCs) in the area who operate on a principle strikingly similar to stock market dynamics. They spread their investments across numerous startups, fully aware that the majority might underperform or fail. However, the success of a few exceptional companies can yield returns substantial enough to offset these losses and generate significant profits.
Take Sequoia Capital, for example. In 1999, they, along with Kleiner Perkins, invested approximately $25 million in a then-relatively unknown search engine company—Google. This strategic bet paid off exponentially, as Google evolved into one of the world’s most valuable companies, providing Sequoia with returns far surpassing their initial investment. Similarly, their early $60 million investment in WhatsApp led to a significant windfall when Facebook acquired the messaging platform for $19 billion in 2014.
This approach mirrors the stock market, where a small fraction of stocks drive the majority of market gains. Just as VCs diversify to increase the likelihood of backing a unicorn ↗, investors can benefit from broad market exposure to capture the outperformance of a select few stocks.
Why Index Investing Works
So, if most stocks don’t perform well, does that mean investing in stocks is a bad idea? Not necessarily. It just means that betting on individual stocks is riskier than most people realize. If you pick the next Amazon, you’re set. But the chances of that happening are incredibly slim. That’s why index funds—like those tracking the S&P 500—are so effective. They ensure that investors capture the handful of winners without betting their entire portfolio on one or two stocks.
Think about it this way: If you invest in an index fund, you’re guaranteed to own the top-performing companies by default. You don’t have to guess which company will be the next big thing because the index naturally adjusts over time. It’s a low-stress, high-reward strategy that has worked for decades.
That said, if you have the risk tolerance and financial flexibility to invest in individual stocks, there’s nothing wrong with taking some calculated bets. Just know that history suggests most of them won’t pan out.
The Modern Magnificent Seven: History Repeats Itself
The idea that a handful of stocks drive the market isn’t new. I’ve written about a similar trend in today’s tech-heavy market, where the so-called Magnificent Seven (Apple, Microsoft, Amazon, Nvidia, Google, Tesla, and Meta) have been responsible for a significant portion of recent market gains. Interestingly, some of these same companies—like Nvidia, Amazon, and Microsoft—also rank among the highest-returning stocks of the last 20+ years in Bessembinder’s study.
This isn’t a coincidence. Over time, dominant companies tend to capture an outsized share of market growth by creating products or services that attract more users, making it increasingly difficult for competitors to catch up. Once a company establishes itself as an industry leader—whether through technological innovation, brand loyalty, or sheer market reach—it often reinforces its position, drawing in even more customers and solidifying its dominance.
Final Thoughts: Play the Long Game
If there’s one major lesson from stock market history and this research, it’s this: time in the market beats timing the market. The best-performing stocks didn’t achieve their massive gains overnight—they did it over decades of compounding returns. While chasing the next hot stock might be tempting, history shows that a diversified, long-term approach is the best way to grow wealth.
The stock market is a game of survival, and only a handful of stocks become the winners that drive the market forward. Investing in an index ensures you capture those winners, while investing in single stocks is more like buying lottery tickets—occasionally lucrative, but mostly disappointing. So unless you’re willing to take big risks, the safest bet is to stay diversified and let time work in your favor.
And remember, it’s always a great idea to chat with your financial or tax advisor to make sure your decisions are right on track and aligned with the latest guidelines and laws.
Sources
- Bessembinder, H. (2024). Which U.S. Stocks Generated the Highest Long-Term Returns? W.P. Carey School of Business, Arizona State University.