Great Stock Theory

Mebane Faber’s new book, The Ivy Portfolio, has two great graphs showing the distribution of stock returns. (Nick Gogerty has posted them here.)
We often talk about the market as a whole, but in reality, the large majority of stocks don’t do much at all. The real gains come from a very modest slice of the market. According to the chart, one-quarter of the market accounted for all the gains.
In short, stock returns have a fat tail. This is why I place so much emphasis on consistency of performance because it’s those “great stocks” that make the difference. The other lesson is that too much diversification really isn’t that helpful.

Posted by on April 14th, 2009 at 2:14 am


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