‘Extreme winners’ take it all while 40% of stocks suffer ‘catastrophic’ declines (2024)

Fancy yourself as a good stock-picker? Think you can spot the next big thing and avoid tomorrow’s losers? Think again.

A recent JPMorgan report highlights just how difficult stock-picking is, with two in every five stocks typically suffering terrible losses from which they never recover.

The report, The Agony and the Ecstasy: The Risks and Rewards of a Concentrated Stock Position, shows stock-pickers are much more likely to experience the agony rather than the ecstasy. Since 1980, 40 per cent of stocks in the Russell 3000 – an index that captures 98 per cent of the US equity market – suffered a "catastrophic" decline in share price of 70 per cent or more.

"We are not talking about temporary declines during the tech boom-bust or during the financial crisis," writes Michael Cembalest of JPMorgan, "but large, permanent declines that were not subsequently recovered".


Additionally, 40 per cent of stocks have delivered negative returns over their entire lifetime, the report found, and two-thirds of stocks in the past 34 years have underperformed the index.

Index investors, of course, have done just fine since 1980, despite so many stocks turning out to be losing propositions. That’s because about 7 per cent of stocks go on to become “extreme winners”; the gargantuan returns earned by companies like Apple, Amazon and Starbucks driving the overall market to healthy gains.

If you'd loaded up on such stocks, you would have made a bundle. You may even have profited by investing in some of the stocks that suffered catastrophic declines, a number of which also end up in the category of extreme winners. Cisco, for example, has returned 27 per cent annually over its lifetime, despite having lost more than three-quarters of its value since 2000.

However, stock-picking would have proved costly for most investors, with the return on the median Russell 3000 stock 54 per cent less than that of the overall index. Some 75 per cent of concentrated stockholders would have benefited from some degree of diversification.

Technology losses

While investors in growth stocks often gravitate to the technology sector in the hope of finding the next Apple or Google, they are much more likely to end up losing their shirt.

“The story of the tech sector is a long narrative about disruptive technologies which are themselves disrupted by changes that follow,” says Cembalest.

Almost 60 per cent of all technology companies suffered a permanent decline of at least 70 per cent; 6 per cent turned out to be extreme winners; more than half generated negative returns; 70 per cent underperformed the overall stock market.

Wealth destruction was particularly acute after the dotcom bubble burst – of 212 internet and software companies in early 2000, only 17 ever saw higher stock prices over the following 14 years.

Might the dotcom crash distort the overall figures? No – even if you excluded all technology, biotech and other companies that went public between 1995 and 2000, the report found, the median return is still negative; the percentage of companies underperforming the index is still about two-thirds; just 7 per cent of stocks are extreme winners. Success and failure rates are similar across most sectors.

Furthermore, while loss rates rise during recessions and market corrections, there is a “steady pace of distress even during economic expansions”.

Underlying reasons

Some companies end up losing out to the technological innovations of competitors, while others bring trouble upon themselves. Companies are liable to overleverage themselves near the end of a business cycle; the report also found many cases of mismanaged acquisitions, as well as management “misreading rapidly changing industry dynamics and competitive factors”.

However, investors should resist the cosy narrative of “good” and “bad” companies, of predetermined triumph and failure. Often, outside factors drive company fortunes.

A company may find its position usurped by foreign competitors backed by government subsidies and exchange-rate manipulation. Governments may change policy in carbon tax regimes and fracking rules, or make changes in the interpretation of antitrust rules, or trade policy changes, or industry deregulation or reregulation, or commodity price risks – or innumerable other drivers of change.

All too often, it is “not clear that even the best management teams in the world could have done much to alter the ultimate outcome”.

Similarly, the so-called “ecstasy stocks” are a “very heterogeneous” bunch, with no obvious way of spotting them in advance. Some generated huge wealth over many decades; others did so in a few short years. Some, like the aforementioned case of Cisco, have been money-losers for many years, but experienced huge growth in the 1990s.

“If history is any guide,” the report cautions, “the drumbeat of business distress . . . will eventually ensnare some of them.”

Investing implications

There are obvious implications for investors. Clearly, stock-picking is extremely difficult, given so many stocks go nowhere while only a handful generate outsized returns. Doing extensive homework may be of limited help: “No matter how well you know your industry and your company, no one is impervious to event risk and industry changes,” Cembalest says.

Accordingly, the case for a diversified portfolio is self-evident. Irish investors should be well aware of this. In 2005, it was estimated that managed funds in Ireland were allocating 25 per cent of total equity to the Irish market, setting the scene for enormous wealth destruction in the coming years. Unfortunately, many remain blind to the benefits of diversification: a recent Barclays report found that just 36 per cent of wealthy Irish people had a geographically diverse portfolio of assets – less than any of the other 17 countries surveyed.

JPMorgan’s report also suggests business risk in the technology sector may be rising, judging by the spate of unprofitable technology companies going public in 2014. So far this year, just 20 per cent of technology companies going public have been profitable at issuance – a level unseen in history, excluding the all-time low of 14 per cent recorded in 1999 and 2000.

Luck and risk

The perils of the stock-picking game tend not to be elucidated in the mainstream media. Analysts assert why such-and-such a stock will outperform, safe in the knowledge no one is keeping score.

As well as that, commentators tend to downplay the importance of luck and risk control in the investment process, as exemplified in the infamous case of US fund manager Bill Miller.

Hailed as one of the greats after beating the S&P 500 for 15 straight years between 1991 and 2005, Miller liked to double down on losing bets. He would continue to buy more as his stocks plummeted, stopping only, as he once said, "when we can no longer get a quote".

The approach proved catastrophic during the global financial crisis, when Miller bet the farm on stocks such as Fannie Mae and Bear Stearns. His fund fell 55 per cent in 2008 and ranked last among 1,187 US large-cap equity funds over the 2006-2010 period.

Taking a concentrated approach can work, of course. It did for Miller for many years, and also helped "drive the success of all 10 of the top 10 on the Forbes magazine list of world billionaires in 2014", says Cembalest. For the vast majority of stock-pickers, however, the odds are stacked against them.

‘Extreme winners’ take it all while 40% of stocks suffer ‘catastrophic’ declines (2024)


What percent of stocks never recover? ›

Percentage Of Stocks with 70%+ Declines & No Recovery

In 2013, J.P. Morgan gave a wider perspective on the risks. Using the Russell 3000 returns since 1980, JPM concluded that roughly 40% of all stocks had suffered a permanent 70%+ decline from their peak value.

Do you lose all your money if the stock market crashes? ›

Do you lose all the money if the stock market crashes? No, a stock market crash only indicates a fall in prices where a majority of investors face losses but do not completely lose all the money. The money is lost only when the positions are sold during or after the crash.

What percent of Americans owned stocks when the stock market crashed? ›

However, as a singular event, the stock market crash itself did not cause the Great Depression that followed. In fact, only approximately 10 percent of American households held stock investments and speculated in the market; yet nearly a third would lose their lifelong savings and jobs in the ensuing depression.

What is the biggest loss of a person in stock market? ›

List of trading losses
Nominal amount lostUSD FX rate at time of lossPerson(s) associated with incident
USD 4.6 bn1John Meriwether
EUR 4 bn
USD 4.5 bn1Gabe Plotkin
USD 4.1 bn1Bill Ackman
50 more rows

What stocks recover the most after a recession? ›

Top investments coming out of a recession
  • Cyclical stocks. Cyclical stocks are virtually the definition of stocks that get hit hard going into a recession, as investors anticipate a peaking economy and begin to sell them. ...
  • Small-cap stocks. ...
  • Growth stocks. ...
  • Real estate. ...
  • Consumer staples. ...
  • Utilities. ...
  • Bonds.
Oct 18, 2023

Has the stock market ever not recovered? ›

Throughout its history, the market has not only recovered from every single recession, crash, and bear market it has ever faced, but it's also experienced positive long-term returns.

At what age should you get out of the stock market? ›

There are no set ages to get into or to get out of the stock market. While older clients may want to reduce their investing risk as they age, this doesn't necessarily mean they should be totally out of the stock market.

What happens to the stock market when the dollar collapses? ›

Impact of Dollar Collapse On Stocks

If the dollar does collapse, the stock market will likely experience significant volatility. Initially, there could be a sharp decline in stock values, particularly for companies heavily reliant on domestic markets and those with large debts in foreign currencies.

Who keeps the money you lose in the stock market? ›

No one, including the company that issued the stock, pockets the money from your declining stock price. The money reflected by changes in stock prices isn't tallied and given to some investor. The changes in price are simply an independent by-product of supply and demand and corresponding investor transactions.

Could the Great Depression happen again? ›

It's possible in principle, but we'll have to move fast. If there is a slump that spreads to the first world oustside the U.S., then we have got to cut interest rates, start spending that budget surplus ... The Great Depression would have been easy to stop in 1930. It was very hard to get out of by 1935.

How much does the average person have in stocks? ›

More Americans than ever are invested in the stock market. Data from the Federal Reserve's Survey of Consumer Finances shows that 53% of all US families owned publicly traded stock in some form in 2019. That is up from 32% in 1989. The median stock value held among households in the market was $40,000.

Who made money in the Great Depression? ›

Business titans such as William Boeing and Walter Chrysler actually grew their fortunes during the Great Depression.

Does the average person lose money on stocks? ›

About 90% of investors lose money trading stocks.

How much stock loss can you write off? ›

No capital gains? Your claimed capital losses will come off your taxable income, reducing your tax bill. Your maximum net capital loss in any tax year is $3,000. The IRS limits your net loss to $3,000 (for individuals and married filing jointly) or $1,500 (for married filing separately).

What is the biggest single trade profit in history? ›

Probably the greatest single trade in history occurred in the early 1990s when George Soros shorted the British Pound, making over $1 billion on the trade. Most of the greatest trades in history are highly leveraged, currency exploitation trades.

Do 90% of people lose money in the stock market? ›

How Many People Lose Money in the Stock Market? About 90% of investors lose money trading stocks.

Why do 90% of people lose money in the stock market? ›

Staggering data reveals 90% of retail investors underperform the broader market. Lack of patience and undisciplined trading behaviors cause most losses. Insufficient market knowledge and overconfidence lead to costly mistakes. Tips from famous investors on how to achieve long-term success.

What happens if you lose 100% of your stock? ›

When a stock's price falls to zero, a shareholder's holdings in this stock become worthless. Major stock exchanges actually delist shares once they fall below specific price values.

Will the stock market always return 10%? ›

While 10% might be the average, the returns in any given year are far from average. In fact, between 1926 and 2024, returns were in that “average” band of 8% to 12% only eight times. The rest of the time they were much lower or, usually, much higher.


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