Why Picking Winning Stocks Is Harder Than It Looks

Most investors experience the stock market through an index such as the S&P 500, and a solid year for the index can easily give the impression that most of the companies inside it did reasonably well. The reality has been quite different, since over long periods the lifetime returns of individual stocks have been sharply uneven, with a long list of disappointing or failed companies on one side and a small group of extraordinary winners on the other, and it is that small group that has carried the market higher.

This is the first of two articles on how stock market returns are distributed. This article looks at how concentrated those returns have been and why that makes finding the next great company so difficult, and the second looks at what the biggest winners had in common and how investors can use that research without trying to pick the winners themselves.

A Small Number of Companies Have Produced Nearly All of the Market's Gains

Research covering U.S. stocks over the past century shows that roughly 4% of companies accounted for all of the stock market's gains above what investors could have earned in Treasury bills, while the other 96%, taken together, did about as well as cash.

The research comes from Hendrik Bessembinder, a finance professor at Arizona State University, who has studied every U.S. common stock listed since 1926. His most recent update, covering nearly 30,000 companies through 2025, found that about 1,000 of them created all of the roughly $91 trillion in wealth the U.S. stock market produced for shareholders over the century.

The Typical Stock Has Struggled

The other side of that concentration is that the typical individual stock has fared poorly, even during periods when the market as a whole did well. In Bessembinder's data, more than half of all stocks lost money over their lifetimes, and only about one in four beat the overall market over its lifetime.

A separate study from J.P. Morgan, covering stocks in the Russell 3000 index from 1980 through 2020, found that 44% of companies suffered what it called a catastrophic loss, a decline of 70% or more from their peak that was never recovered. Those losses were not limited to small or obscure companies, and they occurred in every sector of the market.

Why Stock Returns Are So Lopsided

The skew in stock returns is largely a matter of arithmetic, since a stock can lose no more than 100% of its value while a successful company can gain thousands of percent over several decades, which allows a small number of large winners to more than offset a long list of losers.

Time magnifies the effect. The companies with the largest long-term gains generally did not grow at spectacular rates, but they sustained solid growth for a very long time. Altria, formerly Philip Morris, is one of the best examples, having compounded at about 16.5% per year for a century, which turned a single dollar into roughly $4.4 million.

The pattern also reflects how a market economy works, with new companies constantly forming, many failing or being acquired, and a few growing into dominant businesses. Owning the market means owning both sides of that process.

The Difficulty of Finding the Diamond in the Rough

When so few stocks account for so much of the market's return, any strategy built around a limited number of holdings is working against the odds. A portfolio of 20 or 30 stocks is statistically more likely to miss the small group of outsized winners than to capture them, and missing even one or two of those companies can leave a portfolio well behind the market.

Identifying a future winner is also only part of the challenge, since an investor would need to find it early, hold it through years of volatility and the inevitable periods of decline, and resist the temptation to sell after the first large gain. Each of those steps is far easier to recognize in hindsight than to carry out in real time.

Professional investors with large research teams face the same difficulty. According to S&P Dow Jones Indices, at least 80% of actively managed U.S. stock funds underperformed their benchmarks over the 10 years ending in 2025, after fees.

The Risk of a Concentrated Stock Position

The same research applies to anyone holding a large share of their net worth in a single company, a situation that is common among executives, long-tenured employees with equity compensation, and investors who inherited or bought a stock that has performed well. A strong track record has not protected stocks from reversal, and even well-known market leaders have fallen far from their peaks and never recovered.

Reducing a concentrated position usually involves trade-offs, including capital gains taxes, company trading restrictions, and an understandable reluctance to sell a stock that has been good to its owner. Spreading sales over several tax years, gifting appreciated shares to charity or family, and pairing sales with tax-loss harvesting elsewhere in the portfolio are some of the ways to manage that transition, and the right combination depends on the investor's tax situation, time horizon, and goals.

A Note on Index Concentration

A reasonable follow-up question is whether a broad index still offers enough diversification when so much of it sits in a handful of companies. At the end of 2025, the 10 largest stocks made up roughly 40% of the S&P 500, a record and about twice their typical share from 1990 to 2015.

This is partly the same pattern at work, since an index weighted by company size automatically gives more weight to the companies that have been winning, but it does mean that an S&P 500 fund depends on a smaller group of companies than it has for most of its history. Broadening a portfolio to include mid-size, small, and international companies, and rebalancing periodically so that recent winners do not quietly grow into an outsized share, are practical ways to manage that exposure, and tilting toward certain company characteristics, which the next article covers, is another.

The Bottom Line

The concentration of stock market returns is not an argument against owning stocks, since the U.S. market created roughly $91 trillion in wealth for shareholders over the past century and investors captured that result by owning the market broadly rather than by trying to avoid its losers. What the research does challenge is the assumption that a typical stock will deliver the market's return, or that a handful of carefully chosen names can reliably capture what the market provides. Searching for the diamond in the rough has proven difficult even for professionals, and broad diversification offers a practical alternative by making it more likely that the small number of companies that drive the next several decades of returns are already in the portfolio, whichever companies they turn out to be.

That still leaves an interesting question, which is whether the companies that became the market's biggest winners shared any common traits, and whether investors can make use of those traits without trying to pick individual stocks. The second article in this series looks at that research and how it connects to factor investing.

Tad Jakes, CFP®, EA, ECA

This article is for informational purposes only and should not be considered investment, tax, or legal advice. Past performance does not guarantee future results. References to specific companies are for illustration only and are not recommendations to buy or sell any security. Every investor's situation is different, and readers should consult a qualified financial, tax, or legal professional before making decisions based on the information in this article.