The Australian superannuation industry is a AU$3.3 trillion market, and is one of the world's most respected schemes. AMP is in the game of superannuation, insurance, and investing. And have been since 1849. The company when public in 1998. Since going public, the company has lost 84.1% of investors' total return. Just let that sink in for a second. You just lost 94% of your capital, and after taking dividends into account, you're still down almost 85% on your investment.
This type of return of publicly listed companies is far more normal than you think. It's just that no one talks about it.
JP Morgan publish a report called The Agony & The Ecstasy, which reports on the difficulty of stock picking. In fact, in the US, 40% of stocks in the Russell 3000 since 1980 have lost 70% of their value (defined as "catastrophic loss" and never recovered. We live in a world of fierce competition. Companies who were at the helm yesterday, are merely names in history books tomorrow.
If you're sitting there picking stocks, ask yourself this question, how often would I have been better or worse off owning cash, or the Russell 3000 Index instead of a concentrated stock position?
Here are the facts:
Around 40% of the time a concentrated position in a single stock experienced negative absolute returns, in which case it would have underperformed a simple position in cash.
And around 2/3 of the time, a concentrated position in a single stock would have underperformed a diversified position in the Russell 3000 Index.
While the most successful companies generated massive wealth over the long run, only around 10% of all stocks since 1980 met the definition of “megawinners”.
And so the probability of picking a loser is far greater than picking the Megawinners. And I bet you never hear the stories, do you? Only the ones of the Megawinners, yet only 10% of stocks have met this definition since 1980.
It's easy though, right? Just avoid the losers. I hear it all the time, we've got feet on the ground, we meet with management. Give me a break, are you the only one meeting with management? Who do you think that guy or gal leaving the CEO's office was whilst you we're in the waiting room? Maybe the other folk who meet with management? I wonder what the CEO is going to tell you anyway? The company’s management, its board of directors, research analysts, credit rating agencies and its employees believe in its long-term success. Research has shown that in most instances of business failures, it didn't have anything to do with poor corporate management. Rather, external forces such as:
Intellectual property infringement
Shift in buying power
Collapse in pricing power
Although the winners generate enormous excess returns, the fact is that the median stock ends up underperforming the index.
Next time you think about designing your portfolio, think about what game, and what odds you are playing.