19 June 2017 (AFR) – Positive skew that exists in equity markets – Most sharemarket gains come from a very small subset of stocks

[COMMENT: There are two thoughts that come to mind here. Firstly, the investment period quoted below of 90 years is not relevant to many retail investors, and it is easy to cherry pick a start and end date for comparative purposes to suit the hypothesis. But secondly, and of more interest, is the notion that a small portion of stocks produce the greatest returns. So how can we spot these?]

(19 June 2017, AFR, p22, by Chad Slater)

‘Does the average stock outperform cash? No. – This sentence almost seems nonsensical – of course we know the stock market does better than cash through time, so let’s start with a question: What is the average annual return for US equities over 90 years? OK, got that in your head? Now what do you think the average stock return is over 90 years?

‘If you said 7 per cent, for the first one you would be spot on. If you said the most frequent outcome was a loss of 100 per cent of your capital for the second question, you were right.

‘This is what is called the positive skew that exists in equity markets: most of the gains that come from holding equities come from a very small subset of stocks. Positive skew is when the median (the middle outcome when everything is lined up in order) is below the average (the sum of total outcomes divided by the number). People’s wealth and incomes have this distribution for example, skewed by a few billionaires.