The Truth About Stock Picking: Why Diversification Wins Long-Term

Investors often dream of discovering the next Amazon or Apple—imagining massive gains and an early retirement. But research from Hendrik Bessembinder and insights from Larry Swedroe reveal a harsh truth: the odds of striking it big with individual stocks are far slimmer than most people realize.

In "Owning Individual Stocks: A Loser’s Game," Swedroe argues that stock picking can be more damaging to long-term wealth than most investors understand. And Bessembinder’s decades-long data supports the same conclusion.

📊 The Data Doesn’t Lie

Hendrik Bessembinder’s landmark study, which examined nearly a century of data (1926–2023) across more than 29,000 U.S. publicly listed companies, uncovered some startling truths:

🎯 Over 50% of all stocks lose money over time.
🎯 Just 4% of stocks drive nearly all of the market’s long-term wealth creation.
🎯 Most individual stocks underperform even Treasury bills—yes, those ultra-safe government bonds.

Imagine a carnival where only 4 out of 100 tickets win anything substantial. That’s the stock market for most individual investors.

🚀 High-Growth Stocks Don’t Defy Gravity Forever

Even if you manage to pick a high-performing growth stock, the victory is often temporary. These companies eventually encounter:

🛑 Slowing growth
🛑 Rising competition
🛑 Operational challenges

That means today’s market darling can quickly become tomorrow’s disappointment. Outperformance is rare—and staying on top is even rarer.

📉 Mean reversion—the tendency for extreme performance to revert to the average—is very real. Betting big on today’s winners often leads to tomorrow’s regrets.

🏛️ The Rise and Fall of Market Leaders

Just look at the history of the S&P 500. Decades ago, companies like General Motors and IBM were seen as unstoppable. Today? They’ve faded into the background.

📉 Many former giants lose their edge over time.
📈 Even tech legends like Apple and Microsoft are the exception, not the rule.

Market leadership changes. Betting heavily on a few big names can leave your portfolio dangerously exposed.

🌐 A Smarter Way to Diversify

If you want to go beyond index funds but still avoid random stock picks, rules-based strategies offer a smart middle ground. These approaches rely on disciplined, repeatable criteria—not emotion or hype.

Whether you're filtering for quality, value, momentum, dividends, low volatility, or free cash flow, you're not guessing—you’re applying a consistent lens. At a minimum, you’ve done some level of due diligence and fundamental screening—not just chasing headlines or hype.

Here are common “filters” used by disciplined investors:

📌 Quality stocks with strong cash flows and consistent earnings
📌 Value stocks trading below intrinsic worth
📌 Momentum stocks that ride clear, upward trends
📌 Low-volatility stocks that reduce sharp price swings
📌 Dividend-paying stocks for steady, reliable income
📌 Free cash flow stocks generating surplus cash after all expenses

These strategies reduce emotional decision-making and help investors avoid common traps—like falling for meme stocks or chasing speculative trends.

⚠️ The Real Risk of Owning Individual Stocks

Many investors fall victim to what’s known as uncompensated risk—taking on more risk without earning a better return.

Why does this happen?

🤔 Overconfidence bias: “I can beat the market.”
🎯 Concentration risk: Too much exposure to just a few companies
🚨 Behavioral mistakes: Panic selling or chasing hype

Bessembinder’s research shows positive skewness—a small number of stocks drive most returns, while the majority underperform. This distorts investor perception and makes stock picking seem more rewarding than it actually is.

✅ Why Diversification Wins

Diversification isn’t flashy. But it works.

💡 Reduces risk: No single stock can sink your portfolio.
💡 Taps market growth: ETFs and index funds provide broad exposure across sectors.
💡 Avoids emotional mistakes: You’re not chasing winners or panic-selling losers.
💡 Keeps you consistent: A steady portfolio outperforms short-term stress.
💡 Prioritizes strategy: A rules-based or diversified approach beats chasing headlines or social media “gurus.”

🎯 Investor Takeaway

The dream of picking the next Amazon is exciting—but it’s not a sustainable strategy.

📉 Most stocks underperform.
📈 A select few generate the majority of market returns.
📊 Diversification spreads risk and improves your chances of success.

What should smart investors do?

✅ Build a well-diversified portfolio
✅ Use evidence-based, rules-driven strategies if picking stocks
✅ Ignore the hype—and stick to your plan

📚 Sources

• Swedroe, Larry. Owning Individual Stocks: A Loser's Game. August 1, 2024​(Owning Individual Stock).

• Bessembinder, Hendrik. Wealth Creation in the U.S. Public Stock Markets 1926-2019.