Hendrik Bessembinder in a paper “Do Stocks Outperform Treasury Bills?” (Journal of Financial Economics, 2018) found that across almost 100 years, ~4% of listed stocks accounted for all the net wealth created by the U.S. stock market. In follow-up work, he showed that the same skew exists internationally and skewness has increased in recent decades.
Though concentration has always existed in equity markets, returns in the 20 years pre-GFC were meaningfully less concentrated than returns since 2009. In the US, 50–70 stocks explained ~80% of returns pre-GFC. Post-GFC, equity markets globally have delivered extraordinary returns. New companies have listed and retail participation has exploded. Yet, concentration has only risen. ~30 stocks in the US explain ~80% of returns since 2009. In years like 2023 & 24, 7 stocks explained 55–65% of annual returns.
In India, the contrast is even sharper. Pre-2008, leadership rotated between PSUs, cyclicals and exporters. Post-2009, 12–15 stocks explain ~80% of returns for the NIFTY 50. Widen the lens to the NIFTY 500 and still <10% of stocks matter.
Two possible reasons might explain this increase in concentration. One, capital increasingly flows to scale and certainty. Passive investing, ETFs and benchmark-aware institutional money mechanically allocate more capital to winners as their weights rise. Success feeds on itself. Second, winner-takes-most economics have intensified. Digital platforms, network effects, brand dominance and balance-sheet strength arguably allow leading firms to compound earnings for longer than in previous cycles.
Return concentration delivers a message that is uncomfortable for both active and passive investors and deeply clarifying at the same time. It tells us that stock selection matters enormously but only if it is done right. When returns are highly skewed, too little diversification risks permanent capital loss if a thesis breaks and too much diversification may reduce the likelihood of outsized outperformance. Passive strategies succeed because they systematically capture concentration. As winners grow, indices allocate more capital to them automatically. But passives also have a hidden trade-off where you earn the index return but are also most likely to miss extraordinary outperformance.
Everything above is about buy and hold ownership over long periods. If we look at short term trading, the work of Barber and Odean shows that 80-90% of short-term traders lose money. Short-term trading has Bessembinder-like skew, without the compounding safety net. The conclusion is that if you don’t have a demonstrable, repeatable edge, time works against traders and for owners. Short-term trading can work but only for a tiny minority, operating with discipline, structure and often institutional advantages. Other than for the best stock pickers, owning an index and letting time do the work has historically been a robust approach.
