A handful of winners

There seems to be a narrative in the market suggesting that stocks typically go up over time, and therefore, with a little homework 'my stock picks' will go up even more - but it isn't that simple. This isn't a 50/50-coin toss.

The concentration of winners is more severe than you think.

The Russell 3000 Index has returned an average annualised return of 13% since 1980, but the disparity of returns that generate these profits is rarely focused on.

The vast majority of the positive returns over time can be attributed to just 7% of stocks - the 'mega winners'.

In a similar report studying the historical performance of the S&P 500, only 22% of the stocks in the S&P 500 outperformed the index from 2000 to 2020. Over that measurement period, the S&P 500 gained 322%, while the median stock rose by just 63%.

Put simply, the probability of picking a winner is lower than you think, but all is not lost. A couple of big winners are all you need.

A Few Good Decisions

Warren Buffett - arguably the most successful investor in history, recently attributed his success to just 'a dozen truly good decisions'.

"Over the years, I have made many mistakes - our satisfactory results have been the product of about a dozen truly good decisions — that would be about one every five years. "

That's right, the best investor in history made one good decision every five years. So how can someone who claims this be heralded as an investment guru?

Asymmetry

A stock can only drop by 100%, but there's no technical limit to how high a stock can go, so when you invest in some truly great companies, the handful of winners can more than offset the graveyard of losses you accumulate along the way.

Let's take one of Buffet's most notorious investments as an example;

Over a period of seven years ending in 1994, Buffett accumulated 400 million shares of Coca-Cola at a total cost of $1.3 billion. As of the end of 2022, that position was worth $25 billion. And let's not forget the $704 million in annual dividends.

For me, stocks like TTD and Nvidia have more than offset some very questionable investment decisions. (24-year-old me has a lot to answer for, but you live and learn, I guess).

Obviously, the goal is only to pick winners, but on the off-chance you can't perfectly predict the future, here's a good place to start:

1. Stop trying to jump on every opportunity. Focus on making a few good decisions and give them time to work in your favour.

2. Don't be fooled into thinking every investment will be a winner. You won't stick it out very long if you expect to be in the green 24/7. There will be guaranteed losses along the way, but over time, a handful of big winners is all you need. To get my latest stock picks, sign up to my newsletter by scanning the QR code or go to www.theislandinvestor.com.