Vanguard's New Data is a Reality Check for Investors — Transcript

Full transcript

1. 0:00Vanguard just released some new research
2. 0:01[music] that I think most investors
3. 0:03should pay attention to. It's the latest
4. 0:05version of some of the most impactful
5. 0:06research ever done on the stock market.
6. 0:09[music] I'm going to take you through
7. 0:10it, but instead of going through this
8. 0:11page by page, we're going to start by
9. 0:14playing a game.
10. 0:16This is 12,500 grains of rice. Feel free
11. 0:20to come if you like. Each grain of rice
12. 0:22is one company that has been on the
13. 0:24American stock market between 1990 and
14. 0:27the end of 2025. Now, you can choose any
15. 0:30of these grains that you like to be part
16. 0:32of your portfolio. But first, let me
17. 0:35tell you a couple of things about this
18. 0:36pile just to make it a little bit easier
19. 0:38for you. 56% of the companies here, if
20. 0:41you pick them, you did worse than
21. 0:42basically just sticking your money in a
22. 0:44high interest savings account. Just 10
23. 0:46of these grains. How the hell am I going
24. 0:48to do this? Just 10. Is that about 10? 1
25. 0:512 3 4 5 6 7 8 9. There you go. Just 10.
26. 0:550.08% 08% of the total amount of grains
27. 0:58here accounted [music] for 31% of all of
28. 1:01the wealth created in the Russell 3000
29. 1:04in the top 3,000 businesses in America
30. 1:06over that time period. And what might
31. 1:08surprise you is not all of these 10 are
32. 1:09tech stocks [music] either. Half of the
33. 1:11biggest wealth creators came from other
34. 1:13industries. Food shops, fat jabs,
35. 1:15and fossil fuels all feature on the
36. 1:17list. I thought this Amazon card would
37. 1:18make it easier to shift around the rice.
38. 1:20Turns out I should probably just use my
39. 1:22hands. So the top 10 do a lot of the
40. 1:24heavy lifting, but around two to three%
41. 1:26of all of the grains here, all of the
42. 1:29companies that they represent made up
43. 1:31all the returns for investors. [music]
44. 1:33Now, to be clear, when I say a figure
45. 1:35like that, it sounds like only 2 to 3%
46. 1:37of companies made any money and that 97%
47. 1:40lost it. That isn't the case. A large
48. 1:42chunk of stocks in the market did
49. 1:44underperform. Then there is this block
50. 1:45here that essentially balances it out
51. 1:47again. They produce a return that
52. 1:49counteracts the loss that these lot make
53. 1:52and that brings you back to zero if you
54. 1:54will. So 97% of companies in the market
55. 1:57just cancel each other out. [music] Then
56. 1:59this 2 to 3% of stocks make it worth it
57. 2:01for investors to buy into this broad
58. 2:03market. It's that 2 to 3% that produces
59. 2:06the outsized returns that we associate
60. 2:08with the stock market versus just buying
61. 2:10bonds. I think that point can be missed
62. 2:12when people cite this type of research
63. 2:14from Vanguard and the original from
64. 2:15Hendrickk Bessenbinder. It's not that
65. 2:17most stocks fail and that a handful do
66. 2:19everything. It's that the vast majority
67. 2:21of activity in the stock market does
68. 2:22little for investors. And it's this
69. 2:24chunk here that produces all of the good
70. 2:26stuff. When I hear that, my gut says to
71. 2:28me, well, if we know that picking
72. 2:30winners for most normal investors is
73. 2:32hard because after all, most
74. 2:34professional investors fail at doing
75. 2:35that. So maybe instead of trying to pick
76. 2:38the winners, why don't we just cut out
77. 2:40some of the obvious losers? There's just
78. 2:43so many of them, right? They're stuck to
79. 2:45my hand. I'm going to be finding rice in
80. 2:46my studio for months. There's just so
81. 2:49many losers here, so many duds. Surely,
82. 2:51we could just cut them out from our
83. 2:53investments. How [music] about this one?
84. 2:57Back in 1997, this company had had four
85. 2:59CEOs in 5 years. They were losing a
86. 3:02billion a year, and a competitor had
87. 3:04famously said publicly that you should
88. 3:06just shut them down and give all the
89. 3:07money back to the investors. Who in
90. 3:10their right mind would be buying this
91. 3:12business back then? Well, maybe Forest
92. 3:15Gump would.
93. 3:15>> He got me invested in some kind of fruit
94. 3:19company.
95. 3:20>> Apple computer company went on to be the
96. 3:21third biggest wealth creator over the
97. 3:23period. In 1997, it looked like it might
98. 3:26collapse. How about this one then? This
99. 3:28is an actual fruit business this time.
100. 3:30This is a bottle of Hansen Natural Fruit
101. 3:32Juice, an American company founded in
102. 3:34the 1930s that went bankrupt in 1988 and
103. 3:37then was purchased out of bankruptcy and
104. 3:39then put on the stock market. Does a
105. 3:41struggling fruit juice company make the
106. 3:43cut for you? From 1994 to 2024, this
107. 3:46stock had risen by 200,000%.
108. 3:48Turning $1,000 into 2 million. That
109. 3:51[music] fruit juice company is the best
110. 3:52performing US stock of the last 30
111. 3:54years. It's no longer called Hansen
112. 3:56Natural. They go by the name Monster
113. 3:58Beverage Company nowadays, preferring to
114. 4:00get you juiced up on caffeine instead.
115. 4:03Hindsight is a wonderful thing when it
116. 4:05comes to investing. And it's really easy
117. 4:07for us all to sit here, look back, and
118. 4:09go, you know, well, it was obvious that
119. 4:11Apple computers would win. But at the
120. 4:14time, it just really wasn't. And
121. 4:16avoiding certain markets or sectors
122. 4:17because you think there's a chance that
123. 4:19they might be losers introduces
124. 4:21something that Vanguard refers to as
125. 4:23ROM, the risk of missing out. If you
126. 4:26manage to dodge the 10 worst stocks in
127. 4:27the market, you added a quarter of a
128. 4:29percent a year to the annualized return.
129. 4:32But if you miss just the 10 best, you
130. 4:33lose more than four times that. on £500
131. 4:36a month over 25 years, that's £77,000
132. 4:40worth of gains gone. If we try to
133. 4:41eliminate losers, we might just miss out
134. 4:43on the next winner. Because I don't
135. 4:45think for most investors, it's always
136. 4:46that clear at the time where a company
137. 4:48will go, as I hopefully showed you with
138. 4:50Apple and Monster. And missing out on
139. 4:52just one or two winners can be
140. 4:54devastating. There are way more losers
141. 4:56than winners, but the winners win far
142. 4:58more than the losers lose. Let me just
143. 5:01show you what that looks like with some
144. 5:02actual money so I can bring it to life a
145. 5:04little bit. But before I do that, please
146. 5:06let me tell you about today's video
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176. 6:00QR code on screen. [music] Right, let's
177. 6:02get back to the video. Here are 10
178. 6:04hypothetical investments that I made
179. 6:05each for£1 and how they've performed.
180. 6:08Nine of them lost money. They're now
181. 6:10worth 93p. And then this one went
182. 6:12absolutely crazy. Went all the way up to
183. 6:1559 quid. The average return across this
184. 6:17portfolio per investment is £5.75. But
185. 6:20if you pick any one pile at random, nine
186. 6:22times out of 10 you've lost money. When
187. 6:25we apply this to Vanguard's actual data,
188. 6:26it looks even crazier. So the average
189. 6:29stock across all of this returned 5 75%
190. 6:32but the middle stock lost 6.6%. [music]
191. 6:35This average is being dragged up by a
192. 6:37handful of exceptional performers. In
193. 6:40statistics, they call this skew and skew
194. 6:42is everywhere. A handful of songs on
195. 6:44Spotify get most of the streams. The
196. 6:46world's best tennis player earns about
197. 6:4833 times what the hundth best tennis
198. 6:50player gets. It's also why the average
199. 6:52age of a nappy wearer is 23 years old.
200. 6:54If you think about it, it makes sense.
201. 6:563.1% of UK companies created all of the
202. 6:59305 billion of net wealth generated over
203. 7:02a 50-year period. That number's actually
204. 7:04fallen to 1.8% of companies following
205. 7:07COVID and Brexit. And worldwide, it's
206. 7:09about 2.4% of all the companies created
207. 7:12all of the net wealth. When you just
208. 7:13consider this skew point, it really
209. 7:16highlights how incredible the stock
210. 7:17market is. This is the Russell 3000, the
211. 7:203,000 biggest listed companies in
212. 7:22America. There are 12,500 grains here,
213. 7:25but only 3,000 companies get a seat on
214. 7:28the table at any one time. And over 35
215. 7:30years, that list of companies has just
216. 7:32been cleared and reset the equivalent of
217. 7:34four times over. Just this constant
218. 7:36churning of businesses through the
219. 7:38index. And if you just own the whole
220. 7:40lot, this entire messy pile, you'd have
221. 7:43made a lot of money. And not because
222. 7:44it's just full of consistent winners. I
223. 7:46mean, you could argue it's a graveyard
224. 7:48of failure. In fact, where this big
225. 7:50chunk of poor performers is offset by a
226. 7:52group of more average companies, then
227. 7:54the returns we all crave are delivered
228. 7:56by a few truly exceptional businesses.
229. 7:58In recent years, those exceptions have
230. 8:00been the tech giants. And look, before
231. 8:02you just accuse me of sipping on the
232. 8:04monster pipeline punch that is an actual
233. 8:06flavor of the drink, that is index
234. 8:08investing, I will concede that skew and
235. 8:12index funds and the way that I buy
236. 8:15companies creates a risk within my own
237. 8:17investments. The funds I buy are market
238. 8:19cap weighted. So they invest more money
239. 8:21into bigger businesses. And that
240. 8:23essentially means every time I invest,
241. 8:25I'm backing the companies that have
242. 8:26already won. If those companies were to
243. 8:28fail, I will feel that in my portfolio
244. 8:30as it will slide with them. It's this
245. 8:32concentration at the top that many
246. 8:34investors are ultimately looking to
247. 8:35avoid. It's why we've seen a shift or a
248. 8:37move away from American dominated funds
249. 8:40for a lot of investors. There's been
250. 8:42record investment into funds that
251. 8:44exclude America from the investing mix.
252. 8:46And I think at certain points along the
253. 8:48investing timeline, it is sensible to
254. 8:49derisk your portfolio from
255. 8:51concentration. But where I'm at at the
256. 8:53minute, I accept that feature of the
257. 8:56market because even though it could
258. 8:58result in a decline in my portfolio
259. 9:00tomorrow, say it's the same
260. 9:02concentration, that same factor that
261. 9:04drives that concentration that means as
262. 9:06a new company emerges and grows and
263. 9:08starts to win, I own a piece of it and
264. 9:11then I back it all the way up. Markets
265. 9:13have always been dominated by winners.
266. 9:15skew existed before index funds. We have
267. 9:17data going back to 1926 that shows this.
268. 9:20And just look at the top 10 companies
269. 9:22when the first ever S&P 500 index fund
270. 9:24was available for purchase for retail
271. 9:26investors. And then look at the top 10
272. 9:28in 2000. And now look at it today.
273. 9:31Concentration is not new and churn at
274. 9:33the top isn't new either, nor is the
275. 9:36short-term pain of long-term investors.
276. 9:38But indices that are market cap weighted
277. 9:41also mean if a giant fades so does my
278. 9:44position in them over time as well. And
279. 9:46if a new company rises, so do my
280. 9:48holdings in that new company as well. We
281. 9:50have an example of this recently
282. 9:51actually in the S&P 500. So the top 500
283. 9:54companies in America, the home of the
284. 9:56most exceptional businesses over my
285. 9:58lifetime. And then this is the
286. 9:59performance of the S&P 500 as well. But
287. 10:01if we strip out the magnificent 7, so we
288. 10:04just look at the remaining 493
289. 10:06companies, you can actually see that
290. 10:08recently that 493 companies has been
291. 10:11performing better without the big seven.
292. 10:13That churning then is happening in real
293. 10:15time, if you will. And if you were just
294. 10:16all in on tech because that's been the
295. 10:18dominant theme now for a while, you
296. 10:20would be missing that effect. Here's
297. 10:21what I love about this type of research.
298. 10:23Right? So diversification is often
299. 10:26framed from a negative perspective.
300. 10:28We're told basically don't put all your
301. 10:30eggs in one basket because if you drop
302. 10:32your basket, you'll smash all your eggs.
303. 10:34You know, you won't want to smash your
304. 10:35eggs, would you? You know, don't put all
305. 10:37your money in one place because if
306. 10:38things go wrong, you could lose all your
307. 10:40money. What Vanguard have shown in this
308. 10:42research as well as Hendrickk Besson
309. 10:44Binder who did the original study, is
310. 10:46that diversification isn't really this
311. 10:48insurance against holding the wrong
312. 10:50companies. It's more a protection
313. 10:52against not owning the right ones.
314. 10:55Just before you go, while I have you for
315. 10:57a moment, thank you for watching to the
316. 10:58end of the video. Some of you may or may
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