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  • Writer's pictureJay Patel

Stock Picking, The Odds are Already Against You

Very rarely can an investor successfully pick stock after stock. Fund managers love saying, "it's stock pickers market" during a market drawdown, yet most of them don't even beat their benchmarks. Maybe this is why one of the best stock pickers of our time, Warren Buffet, tells investors to just buy an S&P 500 index fund. This post dives into an investors odds on a single stock against the Russell 3000 (a benchmark index tracking the entire U.S. stock market).



America's Creative Destruction

The United States is considered the world's most entrepreneurial country since it has a high degree of competition and entrepreneurship. This competition leads to a cycle of creative destruction, where new businesses disrupt older businesses who were once disruptors themselves.

One way to view this cycle is through the top holdings of the S&P 500. The top 10 holdings drastically change about every 10 years. Companies who provide more value to society will increase in market cap as long as they continue to do so.

Companies are steadily removed from the S&P 500 due to business distress. 44% of the stocks to ever be in the Russell 3000 have experienced a "catastrophic loss" which is when a stock's price declines 70% from a high and never recovers.


How Often Does Stock Picking Work? Not Often.

Now that we know nearly half of all listed stocks (44% to be exact) experience catastrophic failure, how often is an investor profitable on a single stock position and how often will a stock beat the Russell 3000?

42% of the time, an investor would have been better off holding cash instead of starting an individual stock position.


66% of the time, an investor's individual stock position will underperform the Russell 3000. Only 1 out of 3 companies to be listed beat Russell 3000.


10% of the time an investor's individual stock position will hit it out of the park because only 10% of stocks listed since 1980 would have been considered "Megawinners" (a stock with a 500% cumulative return vs the Russell 3000).


Based on the stocks to ever be listed in the Russell 3000, when picking a stock, an investor starts off with a higher probability of choosing one that will underperform the Russell 3000. Hunting for alpha isn't impossible, but you're more likely to swing and miss at the bat let alone knock it out the park.


Notable Examples of Failures

Some of these names came to mind when thinking of business failure and "catastrophic loss" in stock price.


Netflix: An idea so good everyone copies it. Netflix was such a great disruptor, media production companies started their own streaming services instead of licensing content to Netflix effecting it's subscriber growth.


Snapchat: Always had trouble with free cash flow and increasing its ad revenue. Social media is a trend, and the kids are on Tik Tok now.


AliBaba: Outspoken Chinese CEO, meet the Chinese Communist Party officials.


Red Robin: The stress eating business model is better executed by competitors like Applebee's, TGI Fridays, and Chili's. Can't blame Covid-19 for poor marketing, sales growth, better burger options elsewhere, and over reliance on mall locations to drive customer traffic.


Coty Brands: Conglomerate of 77 luxury brands, or 1 parent with 77 kids. Business model was to take on debt to acquire more companies leading to too many CEOs to manage.


Abercrombie and Fitch: When the cool kids decide you're not cool anymore.


Schlumberger: The American oil field boom ended in 2014. Active US rig count is half since then, and oil field servicing companies' stock prices haven't escaped the decline in business.


Range Resources: An entire industry of shale drillers forgot what scarcity was. Drilled too much and flooded the market with an oversupply of natural gas leading to declining shareholder returns.


AT&T: Its history dates back to the telephone. The company maintained an effective monopoly on the local telephone service until anti-trust regulators forced it to split and restructure. It hasn't recovered since, even with a handful of large acquisitions and transition to media.


Royal Caribbean: Based in Liberia, the world’s poorest country. they can dodge taxes and labor laws, which makes getting funding during bad times hard and government support pretty much impossible.



Tanger Outlets: The outlet mall on highways has been in decline before Covid shifted more consumers to online shopping.


General Electric: A 100-year reign; an original stock in the Dow Jones when it was created (until 2018), and providing cheap electricity to fuel industrial American growth since the late 1800s. In 2017, poor succession planning when splitting the company, cutting dividends, layoffs, piles of debt, and management turnover killed the giant.


American Airlines: Historically, airlines are bad investments. In 1995, there were 95 airlines in the US. Today there’s 21. American got to its heightened position with mergers leading to domination in routes, but now due to its size it faces some of the highest overhead in the industry, most pilot shortages, delays, and cancellations.


Blog/Insights Disclosures: The commentary on this website reflects personal opinions, viewpoints, and analyses of ClearPeak Capital Management LLC employees. Blog posts written by employees should not be regarded as a description of advisory services, solicitation to sell advisory services, or performance returns of ClearPeak Capital Management's clients. Opinions and views depicted in the blog material are subject to change at any time without notice, and are never to be considered investment advice, performance data, or any recommendation that any particular security/portfolio of securities/investment strategy is suitable for any specific person. Indexes are unmanaged, cannot be directly invested in, and are for illustrative purposes only. Any mention of a particular security and its related performance data does not constitute a buy or sell recommendation for that security. ClearPeak Capital Management. ClearPeak Capital Management manages its clients' accounts using various investment techniques and strategies which are not discussed in the commentary. Investments in securities involve the risk of loss and past performance is no guarantee of future results.

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