Do Stocks Outperform Treasury Bills? (Not What You Expected)
Hendrik Bessembinder, an academic, published a study in 2017 that went on to become widely spread and known. His hypothesis was pretty straightforward: do stocks outperform Treasury Bills?
No, most stocks fail to beat one-month Treasury Bills during their lifetime as a public company, a fact we assume few investors expected or knew. Between 1926 and 2015, only 43% of equities carried a return higher than Treasury Bills. Only 86 of 26 000 stocks made half the return.
Most invest in stocks because they know that it has been a good investment (historically) with about 10% annual returns. But unless you have a diversified portfolio, you are likely to underperform, just like most retail traders do. Bessembinder’s results show that the odds of picking good stocks are stacked against you.
Yes, stocks have been an excellent investment, but only a few select stocks have made all the difference. While the group average has been outstanding, the median stock has performed poorly. This explains why picking stock is so tricky: Most stocks fail to make much headway during their lifespan.
Do Stocks Outperform Treasury Bills?
In 2017 Hendrik Bessembinder from Arizona State University published a research report called Do Stocks Outperform Treasury Bills? that looked more closely at the returns of public stocks from 1926 to 2015. You can download the report here.
The database consisted of shares listed on the American Stock Exchanges between 1926 to 2015. A total of 26,000 different shares had been listed during this period, and the following observations were made:
- Shares have a short life: the listed median time is only seven years.
- Simulations by choosing only one random stock per month had lower returns than a market-weighted index (such as the S&P 500, for example) in 96% of the simulations.
- Simulations by choosing only one random stock per month made it worse than an equal-weighted index in 99% of the simulations.
- The 1,000 best shares accounted for all excess returns in relation to treasury bills. These 1000 stocks are only 4% of the shares in the database.
- 4 of 7 stocks failed to beat on-month Treasury Bills.
- Only 86 stocks accounted for more than half of the return (0.33% of the universe).
Results Simulations – Table
Bessembinder went on to perform bootstrap simulations and the table below summarizes the numbers in 10,000 bootstrap simulations (one stock invested per month):
Trading Rules
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| Return | 1 year | 10 year | 90 year |
| >0 | 53,6% | 53,3% | 50,9% |
| >Treasury Bills | 50,7% | 48,5% | 27,6% |
| >market weighted index | 42,9% | 29,8% | 3,8% |
| >equal-weighted index | 40,6% | 24,3% | 1,2% |
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Median vs. average stock
Bessembinder’s results indicate why most retail investors fail miserably (confirmed by many research reports, among them Dalbar Inc.). Picking a random stock, you are most likely to pick a “loser”.
Look at this arbitrary order of an equal-weighted stock market:
| Return | |
| Stock 1: -19% | |
| Stock 2: -10% | |
| Stock 3: -9% | |
| Stock 4: -9% | |
| Stock 5: -8% | |
| Stock 6: -6% | |
| Stock 7: -5% | |
| Stock 8: -5% | |
| Stock 9: -4% | Median |
| Stock 10: -3% | |
| Stock 11: -2% | |
| Stock 12: -1% | |
| Stock 13: 8% | |
| Stock 14: 10% | |
| Stock 15: 21% | |
| Stock 16: 24% | |
| Stock 17:105% |