Picking a market-beating stock is far from a coin flip 🪙
A simple concept explains how a few big winners carry the market's returns 💪
Picking stocks in an attempt to beat the market averages is a challenging and often money-losing endeavor. In fact, most professional stock pickers aren’t able to beat their benchmarks consistently.
One reason for this is that few stocks actually deliver above-average returns.
According to S&P Dow Jones Indices, only 19% of S&P 500 index constituents outperformed the average stock’s return from the beginning of 2001 through Sept. 2025.
Just 44% of S&P 500 constituents outperformed the index in the first half of 2025. Only 28% outperformed in 2024. Most S&P stocks underperformed the index in 13 of the past 24 calendar years.
In other words, the odds of picking market-beating stocks have historically been worse than a coin flip.
If you beat the odds and successfully pick a market-beating stock, you could crush the market average. That’s because returns are positively skewed, and they have a very long right tail. When you invest in a stock, you can only lose 100% (the left tail), but your upside (the right tail) is theoretically unlimited.
This speaks to TKer Stock Market Truth No. 4: Stocks offer asymmetric upside.
“A long-standing challenge that active managers face is the positively skewed nature of equity returns, with an average return greater than that of the median,” wrote Anu Ganti, S&P Dow Jones’ Head of U.S. Index Investment Strategy.
“The median return was 59%, far less than the arithmetic average of 452%,” Ganti observed after reviewing the data since 2001.
So while half of the S&P 500 constituents generated a return of 59% or less, the minority of stocks generating extraordinary returns lifted the average all the way to 452%.
The chart below explores this story from the perspective of each year’s performance. As the red dots show, the average return has been greater than the median return in 20 out of the past 24 years.
“When fewer stocks outperform, active management is harder,” Ganti said. “This is especially relevant for more concentrated portfolios that may be less likely to hold one of the relatively small number of outperforming stocks.”
This echoes something Warren Buffett said in his 2023 annual letter.
‘It takes just a few winners to work wonders’ 🏆
Buffett, CEO of Berkshire Hathaway, is often praised as history’s greatest investor. His legendary knack for picking stocks for Berkshire’s equity portfolio helps explain why the company’s shares have massively outperformed the S&P 500 over the years.
However, returns have not been evenly distributed across Berkshire’s stock holdings.
“Over the years, I have made many mistakes,” Buffett explained in his annual letter published in 2023 (emphasis added). “Our satisfactory results have been the product of about a dozen truly good decisions — that would be about one every five years.“
At the time, he walked through examples, including Coca-Cola and American Express, which multiplied in value many times over while returning massive cash dividends. Read more about it here.
“The lesson for investors: The weeds wither away in significance as the flowers bloom,” Buffett said. “Over time, it takes just a few winners to work wonders.”
The definitive work on how just a few stocks generate the bulk of the market’s return comes from Arizona State University professor Hendrik Bessembinder.
In 2017, Bessembinder made waves with his research paper that observed most stocks had been pretty crummy investments that underperform Treasury bills. (Read the news coverage here, here, and here.)
In another paper, Bessembinder found that “the top-performing 2.4% of firms account for all of the $US 75.7 trillion in net global stock market wealth creation from 1990 to December 2020.“
“This exceedingly small number shows how difficult it is for a company and its successive management teams to maintain high returns on capital and competitive advantage over the long term,” Nicholas Colas, co-founder of DataTrek Research, wrote in a September 5 note.
Zooming out 🔭
This difficulty in identifying market-beating stocks is why many experts — including Buffett — recommend that most investors allocate the bulk of their equity holdings to S&P 500 index funds, where you’re likely to get exposure to these mega outperformers.
“The whole point of stock markets is to allocate capital to its best possible uses, and the companies at the top of that heap are few and far between,” Colas said. “A stock index like the S&P 500 is not a great long-term investment because most stocks ‘work,’ but rather because a handful of companies reshape the world in their image.”
To be clear: There’s nothing wrong with investing in specific businesses you believe in or stocks you think offer some extraordinary value.
However, if your intention is to beat the market, you should manage your expectations.
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