The Number of Stocks Has Dropped in Half

In the Wall Street Journal, Jason Zweig points out that the number of publicly traded stocks has dropped in half over the last 20 years. This, Zweig posits, may help explain why so many active managers have failed to beat the markets. The reasoning is that the stocks that went into making historically-attractive strategies are no longer around.

Small-caps work! But there are so few small-caps left.

Or, micro-caps work! But there are only a handful left.

As a result, active managers are plowing over the same fields. The effect has hit the small-cap arena especially hard. Twenty years ago, there were over 4,000 stocks that were too small for the Russell 2000. Today, there are less than 1,000.

I tend to be skeptical about claims that don’t make intuitive sense. For example, tobacco stocks have done very, very well historically. That’s great, but I don’t see it as a reason why that should continue. They’re for-profit companies just like so many others. But it does make sense for bonds to lag stocks over the long-term because they’re different kinds of instruments.

Whenever we hear that “value” or “momentum” has done well in the past, we have to remember that it’s likely that meant a very different group of stocks that we have to work with today.

Posted by on June 26th, 2017 at 11:23 am


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