I ask because it is the best performer so far this year among the stocks in the S&P 500, according to FactSet, with a gain of 186%. That compares to a gain of “just” 26.8% for the index itself.
Though Devon Energy’s rags-to-riches story is dramatic, it is not unique. Consider the 20 stocks with the worst 2020 returns in the S&P 500 index SPX, -0.14%. Their average year-to-date return is 68.1%, more than 40 percentage points ahead of the index itself. Other years’ results exhibit a similar pattern.
To appreciate why skewness makes it difficult for stockpickers to beat a buy-and-hold, consider research conducted by Hendrik Bessembinder, a finance professor at Arizona State University. In a study that appeared in the Journal of Financial Economics in 2018, Bessembinder found that “the best-performing 4% of listed companies explain the net gain for the entire U.S. stock market since 1926.” The other 96% of stocks, on average, did no better than 90-day T-bills.
In a separate study, Bessembinder and colleagues found that non-U.S. stocks are even more skewed. Specifically, they found that “Outside the U.S., less than 1% of firms account for the $U.S. 16.0 trillion in net wealth creation [since 1990]. These results highlight the practical implications of the fact that the distribution of long-run stock returns is strongly positively skewed.”I furthermore suspect that the skewness in stock market returns, already extreme, is becoming even more so.