In this article I explore the difficulties in investing and why most public companies fail to succeed in public markets.
Over the last 30 years, more than half of all public companies have underperformed U.S. Treasury bills—the world’s safest asset. In other words, you would have done better holding T-bills than betting on most stocks. So why is investing so difficult? And why do so many businesses fail to succeed in public markets? The answers come down to profitability, cost of capital, and competition.
What Drives Stock Prices?
At the core, stock prices are driven by supply and demand. These forces are shaped by financial performance, growth prospects, and broader economic conditions. When a company delivers strong earnings and a positive outlook, demand for its shares rises, pushing the stock price higher.
To assess whether a company is generating sufficient returns, we must look beyond headline profits and examine its capital structure and cost of capital. What ultimately drives stock performance is how much a company earns relative to what it costs to fund those earnings. A simple proxy for this is Return on Equity (ROE). Companies with an ROE above 10% are generally considered to be earning returns above their cost of capital.
How Many Companies Actually Beat T-Bills?
Hendrik Bessembinder, a professor at Arizona State University, studied this question in his article “Long-Term Shareholder Returns: Evidence from 64,000 Global Stocks.” He found that:
- Over one month, just 49.2% of stocks outperformed U.S. T-bills.
- Over one year, 51.9% did.
- Over a decade, only 48.5% managed to beat them.
In other words, most stocks fail to deliver excess returns compared to the risk-free benchmark.
Why So Many Fail
For a stock to consistently outperform Treasury bills, the underlying company must earn a meaningful return on capital—generally above 10%. If it doesn’t, the market perceives it as value-destructive, eventually withdrawing investment and driving returns lower.
The core challenge is competition. Most firms operate in crowded markets and struggle to build durable competitive advantages—or “economic moats.” Without a moat, companies face constant pressure from new entrants, existing rivals, and shifting supplier or customer dynamics. Capitalism is relentless in chasing profit pools and eroding margins.
Sustainable outperformance depends on a company’s ability to protect its returns on capital. Moats extend profitability, stabilize cash flows, and insulate margins. But they are difficult to establish and even harder to maintain, as they rely on the delicate interplay of strategy, management skill, and innovation.
The Skewed Nature of Stock Returns
Another important feature of stock returns is that they are positively skewed. A simple example illustrates why. Imagine returns can only be +10% or –10% each year. At first glance, this looks perfectly symmetric. But compounding changes the story:
- Two years of +10% returns is not +20%, it’s about +21%.
- Two years of –10% returns is not –20%, it’s about –19%.
So even with identical short-run outcomes, compounding creates asymmetry: the upside grows slightly larger than the downside.
And in the real world, this asymmetry is even greater. A stock’s worst possible outcome is –100% (bankruptcy), but the upside is uncapped—stocks can rise 200%, 500%, or more. This combination of limited downside and unlimited upside creates a natural positive skew in stock returns.
Other Structural Challenges
Beyond competition and skewness, companies face cyclicality, industry-specific pressures, and management challenges. These structural headwinds ensure that sustaining high returns on capital will always be rare. Old competitors persist, new ones emerge, and disruptive technologies continuously reshape industries.
Concentration of Wealth Creation
Bessembinder’s findings underscore this reality: from 1990 to 2020, just 2.4% of U.S. stocks generated all the net gains in the domestic equity market. Even more striking, 0.25% of companies accounted for half of all global wealth creation. This extraordinary concentration shows how difficult it is for companies to consistently allocate capital effectively and maintain competitive advantage across decades.
Conclusion
This explains why the majority of companies fail to beat even risk-free Treasury bills—and why broad indices like the S&P 500, while diversified, often rely on a handful of dominant firms to deliver most of the gains as the weighting of the big winner plays a big role in the indexes returns. This is the brutal truth about stock market returns: the average company is not enough. Most firms fail to beat even risk-free Treasury bills, and wealth creation is concentrated in a tiny minority with durable moats, visionary leadership, and the ability to adapt.
For investors, the lesson is clear:
- Diversification is essential—broad indices protect you from the majority that underperform.
- Conviction matters—long-term success comes from owning and holding the rare outliers that compound far above the rest.
In the end, stock market wealth is not built on the many—but on the very few.