Most Investments are Actually Bad. Here’s Why.

Historical data shows that the vast, vast majority of investments perform poorly.

This is true for bonds, stocks, and real estate as asset classes. Nearly all of it makes for a bad investment for outside passive investors.

And what I’ll show in this piece is that this is both normal and unavoidable. And unintuitively, I’ll also show that it doesn’t mean that most of those investments shouldn’t have happened. But it does inform us a lot about how we should try to invest as allocators of capital.

A History of Duds

Whether we look at bonds, stocks, or real estate, the returns for most investments are bad. The top outliers account for most of the returns.

We can go through them one-by-one to quantify how bad they are:

Historical Bond Returns

The U.S. dollar was the second-best performing currency over the past century, second only to the Swiss franc. The United States was the largest economy in the world throughout this period, and the dollar rose to become the world reserve currency during this time. And yet, holding U.S. government bonds during their time of ascent and dominance underperformed simply holding gold.

Professor Aswath Damodaran maintains records of the performance of various assets classes going back to 1928. If you had invested $100 in T-bills starting in 1928 and compounding them through 2023, you would have $2,249 by the end of 2023. If you had taken more volatility risk and instead invested in longer duration T-bonds, you would have turned $100 into $7,278.

That seems great at first, except for the fact that this is entirely due to dollar debasement along the way. If you had simply put $100 into gold, you would have turned $100 into $10,042. The number of dollars in the U.S. broad money supply increased by more than 400x from 1928 through 2023.

And gold holders were gradually diluted too. That’s why they only had a 100x nominal gain rather than a 400x nominal gain which would be in line with the money supply growth. Every year, the global supply of refined gold increases by an estimated 1% to 2%, which gradually impacts a gold holder’s purchasing power. If the supply of refined gold grows by an average of 1.5% per year, then after 95 years the amount of refined gold on the market will have increased by about 4x.

And the math checks out; each unit of gold increased in dollar price by about 100x, and there’s about 4x as much of it, and so the market capitalization of gold increased by about 400x which is in line with the money supply growth.

As a result of this gradual dilution, over the long arc of time a gold holder’s ability to purchase things like a barrel of oil has been pretty much flat, even as our ability to get oil out of the ground becomes better due to improving technology. Here’s the chart of the price of barrels of oil denominated in ounces of gold:

A gold holder’s purchasing power gradually increases for things that we get exponentially better at making. A gold coin can buy more agricultural products today than it could a century ago, and more electronics, and more shoes.

But it’s not because gold appreciated, and indeed gold was gradually diluted. It’s just that gold was diluted at a slightly slower rate than human technology/productivity increased in aggregate, and so a gold holder maintained or gradually increased her purchasing power over time in practice. And she beat government bonds denominated in the world reserve currency, let alone every other currency.

Historical Stock Returns

Multiple studies over the years have shown that a tiny percentage of equities make up virtually all returns in equity markets.

Professor Hendrik Bessembinder compiled some of the most comprehensive datasets on this phenomenon.

For his U.S. study, he found that among 26,000 identified stocks between 1926 and 2019, more than half failed to outperform T-bills. But the reality is even worse than that. Just 4% of all stocks accounted for basically all stock market returns in excess of T-bills; the other 96% of stocks collectively matched T-bills as a group. And just 86 stocks accounted for half of all excess returns.

In other words, the majority of U.S. stocks historically underperformed T-bills, and then another big minority of stocks generated only minor excess returns over T-bills, and then a very small sliver of massive outperformers represented nearly all stock market excess returns over T-bills. And as the previous section showed, T-bills underperformed gold. And so, the vast majority of stocks failed to outperform the purchasing power of a piece of yellow metal.

And that’s for the United States, which had the best-performing stocks of the past century. For non-U.S. equities, the numbers are even worse. For his global study, Bessembinder studied 64,000 stocks from across the world over a three-decade period and found an incredible concentration of returns:

We study long-run shareholder outcomes for over 64,000 global common stocks during the January 1990…