The 1995-96 Chicago Bulls were an absolute powerhouse, finishing with a record 72 regular season wins, an NBA championship and remembered as one of the greatest NBA teams ever. Michael Jordan averaged 30 points per game which equated to nearly 30% of his team’s nightly scoring. Compared to the average player on the Bulls, Jordan scored 6 times more points per game. So what do Michael Jordan and the Chicago Bulls teach us about investing?
Just as Michael Jordan carried the bulk of the scoring burden, each calendar year has a select few number of stocks that generate the bulk of returns for an index. The 2017 study “Do Stocks Outperform Treasury Bills” found that “the entire gain of the US stock market since 1926 is attributable to the best-performing four percent of listed stocks.”
It is worth repeating: just 4% of stocks generate the entire gain of the stock market. The concern comes when an investor tries to only buy the next Michael Jordan-type stock and ends up with a dud.
Unlike basketball, where the team’s leading scorer can reasonably be predicted, finding winners in the stock market is tremendously more challenging. Digging through financials, correctly predicting market reactions to quarterly earnings, global events, and finding industries with sustainable tailwinds are all fundamental challenges faced by investors who own individual stocks. Missing just one of these variables can be the difference between making and losing money.
The same study also found “only a minority (49.2%) of CRSP common stocks have a positive lifetime holding period return, and the median (a common way to measure averages) lifetime return is -3.67%.”
While the stock market averaged a 10% return, the average stock return was negative. This disconnect between individual stock and stock market returns is because the gains of the few outweigh the losses of the many. And by choosing to invest in individual stocks, the odds do not favor the individual investor.
Knowing these fundamental facts, an investor must ask them self how they should invest for the future. At DWA , we believe it is more prudent to invest in a group of stocks averaging 10% a year than to invest in an individual stock that averaged -3.7%. We believe that if you invest with the long-term in mind the odds are in your favor.
Instead of investing in individual stocks, each investor has an opportunity to invest in a basket of stocks that include the Michael Jordan’s, Dennis Rodman’s, and Scottie Pippen’s of the world. Just as the 1996 Bulls had more bench players than superstars, investing in a basket of stocks allows your portfolio to benefit from all-star individual performances.