The answer seems to be yes.
Lottery tickets are not good investments. Even when jackpots reach astronomical sums, an individual ticket is likely to produce a loss. Ensuring your profits requires buying every ticket and that strategy ignores the dilutions of your winnings by taxes and potential multiple winners. So what does this have to do with stocks?
In his paper “Do Stocks Outperform Treasury Bills” (May 2018), Hendrik Bessembinder reveals that most stocks have underperformed Treasury Bills. Here are some of his findings:
- Most common stocks have lifetime buy-and-hold returns less than the return on one-month Treasuries.
- When stated in terms of lifetime dollar wealth creation, the best-performing 4% of listed companies explain the net gain for the entire US stock market since 1926, as the performance of other stocks collectively matched Treasury bills.
- Less than half of monthly common stock returns in the Center for Research in Security Prices database (CRSP) are positive.
- Of all monthly common stock returns contained in the CRSP database from 1926 to 2016, only 47.8% are larger than the one-month Treasury rate in the same month.
- Approximately 25,300 companies have issued stock since 1926. Just five firms (Exxon Mobil, Apple, Microsoft, General Electric, and International Business Machines) account for 10% of the total wealth creation.
- Slightly more than 4% of the total stocks in the CRSP data account for all of the net wealth creation. That is, the remaining 96% of common stocks collectively generate lifetime dollar gains that matched gains on one-month Treasury bills.
- These results help to explain why poorly diversified (smaller groupings) active strategies most often underperform market (very large groupings) averages.
So what does this have to do with a lottery? A major point of the paper is that large positive returns to a few stocks offset the modest or negative returns to more typical stocks. As in a lottery, a few big winning tickets offset a lot of losing tickets.
Investors in the stock market require expected returns to compensate for their risk suggesting that the stock market as a whole is different in some ways from a lottery. Buyers of lottery tickets lose, and expect to lose, as a whole while stock investors expect to win as a whole.
Bessembinder studies stocks from 1926 – 2016. Recent decades are even worse than earlier years. “…the percentage of stocks that generate lifetime returns less than those on Treasury bills is larger for stocks that entered the CRSP database in recent decades”.
We prefer to avoid the lottery effect by utilizing broadly diversified funds likely to include the few stocks that do well rather than a fund that tries to pick a few companies and hope that some of those are the lucky ticket winners.