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edit: I really wanted to ask "do people who buy and hold individual stocks for longer than 10+ years have a much better chance of outperforming the market, such that this is actually a better strategy than relying on index funds?"

The average retail investor has a ROI of 2% vs the S&P 500’s return of 9.8%.

But this unfortunately includes people who make a ton of emotional trades. For example people who doubt their choice and liquidate everything when it underperforms in the short term. People who try to time the market. People who sell solid innovative companies too early to “lock in gains” and people who try to day trade.

And then we’re comparing this to a theoretical investor who buys the entire US market and never sells.

But what about comparing people who buy and hold their top 5-10 individual stocks and never sell as well?

So far I tried backtesting this with various US blue chip stocks like McDonald’s, Costco, Apple, BRK, Google, j&j, WM, GE, Intel and so forth. For 10+ years and almost all of them outperformed the market.

I even tried getting rid of the obvious massive tech winners and just relying on stocks like McDonald’s, Coca-Cola, Costco, j&j and GE from 2010-2020 and it just very slightly underperformed the market with 11.71 CAGR vs 12.97 CAGR of the S&P.

But if you do a longer time period of 15+ years this non-tech portfolio actually outperformed the market.

Every time I see studies promoting index funds it always includes comparing the emotional retail investor vs the market. Or the fund managers who aren’t allowed to take risk or have to show quarterly results vs the market.

But I think a more fair comparison are retail investors who also buy, hold and never sell vs the market and fund managers with a long term 10+ years strategy such as the ARK ETFs vs the market.

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    I think you may have answered your own question. – Rocky Oct 23 '20 at 21:42
  • @Rocky Thanks, but the real question I wanted to know the answer to is if buying and holding a basket of stocks has better risk adjusted returns than buying index funds. And maybe if there are any studies that compare long term investors of such stocks(10-15+ years) vs the market. – okmanl Oct 23 '20 at 21:47
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    anecdotally, my long term picks (20+ years) have done about 2% worse than my S&P Index fund, and I'd like to think I'm a conservative yet savvy picker of stocks. I doubt it's a big mistake either way, but I think my lesson learned is that I don't need to beat the market, I'm happy to match it – Rocky Oct 23 '20 at 21:50
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    You will want to be more specific about what you mean by 'chance of outperforming the market'. It's possible that even if an individual stock underperforms a majority of the time, that strategy could have a higher expect payoff, if when a stock overperforms it overperforms BIG. Individual stocks undoubtedly have higher variance than the market as a whole. – Brady Gilg Oct 23 '20 at 22:00
  • "have a much better chance of outperforming the market" than what? Index funds? Doesn't that make the question meaningless since index funds can't beat the market? – jcm Oct 24 '20 at 3:18
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I even tried getting rid of the obvious massive tech winners and just relying on stocks like McDonald’s, Coca-Cola, Costco, j&j and GE

You used survivor bias to pick your stocks.

  • You picked Costco, but didn't pick Toys R Us, Sears, Radio Shack, or JCP.

  • You did pick GE, which has had a tough decade but also didn't pick airline stocks.

  • Energy companies have been boom or bust as fracking became popular but now with lower energy prices they are struggling. You avoided them.

  • You also avoided companies like Theranos.

  • You did pick Coca-Cola but didn't pick Hostess Brands

If you pick with an unlucky streak, you might always under perform the market. You might never break even, the peak value could be a few months into your 10+ years of ownership.

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    Hey, mhoran. I added the link to emphasize the fact that the expression is very important, and often impact any back testing. +1, this was exactly what I was thinking as I read the question. – JTP - Apologise to Monica Oct 24 '20 at 12:47

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