Why Picking Stocks Is Much Harder Than Most People Think

When hunting for multibaggers, one has to look for small , founder-led, quickly-growing companies, large markets, and high returns on capital.

Today I want to explain why we need such a strict filter.

Because the statistics are far more brutal than most investors realize.

Imagine someone offered you the following game.

There are 100 boxes.

Only four contain a life-changing treasure.

The other 96 are either empty or contain less money than if you had simply left your cash in a savings account.

Would you still pick boxes randomly?

Of course not.

Yet that is remarkably close to what investing in individual stocks has looked like throughout history.

The study almost nobody expected

A finance professor named Hendrik Bessembinder asked what sounds like a very simple question:

How many stocks actually created the wealth of the U.S. stock market?

To answer it, he looked at almost every publicly traded U.S. company since 1926.

The result surprised even professional investors.

Only about 4% of all listed companies generated all of the stock market’s wealth above Treasury bills.

Read that sentence once more.

Not most, not half, not even twenty percent.

Four percent.

Everything else, taken together, barely beat simply lending money to the U.S. government.

Even more surprising, more than half of all publicly traded companies actually lost money for long-term shareholders over their lifetime as public companies. Depending on the period studied, the number is roughly between 51% and 58%.

So statistically speaking, if you had picked a random stock during the last century and held it until the end of its public life, there was a better-than-even chance you would have been worse off.

That completely changed the way I think about stock picking.

But wait… doesn’t the stock market always go up?

This is where it becomes interesting.

Whenever people show long-term charts of the S&P 500, the line goes steadily upward.

So how can both statements be true?

The answer is surprisingly simple.

The market goes up because a very small number of companies become absolutely enormous. (Pareto-principle!)

Think about average income.

Imagine ten people sitting in a café.

Nine earn normal salaries. Then Jeff Bezos walks in.

Suddenly the average wealth inside the café becomes astronomical.

Did everyone suddenly become rich? Of course not.

The average changed because of one extraordinary outlier.

The stock market behaves exactly the same way.

A handful of exceptional businesses pull the entire market upward while thousands of ordinary companies quietly disappear, stagnate, merge, or slowly destroy shareholder value.

Once you understand this, the stock market suddenly makes much more sense.

So who are these extraordinary companies?

Some names are obvious:

• Apple
• Microsoft
• Amazon
• Alphabet (Google)
• Nvidia

Together they created an astonishing amount of shareholder wealth.

Apple alone has created several trillion dollars for investors.

But here’s something I find much more interesting.

One of history’s greatest compounders wasn’t a glamorous AI company.

It wasn’t even a technology company.

It was Altria, formerly Philip Morris: A cigarette company.

For decades it operated in an industry surrounded by lawsuits, regulation, negative headlines and public criticism.

Hardly the sort of business people get excited about at dinner parties.

Yet it quietly compounded shareholder wealth year after year.

That is a useful reminder: Great investments don’t always look exciting.

Sometimes they look boring, unpopular, almost embarrassing to own.

The stock market doesn’t hand out returns for being fashionable.

So should we just buy index funds?

Honestly?

For most people, yes.

And there is absolutely nothing wrong with that.

An index fund automatically owns the future winners.

Nobody knows today which companies will become tomorrow’s Apple or Nvidia.

Buying everything is an elegant solution.

But that’s not the game we’re discussing in this series.

We’re asking a different question.

Can we identify extraordinary businesses before everyone else notices them?

That is a much harder challenge.

The lesson for multibagger investors

Here’s the mistake many people make.

They finally discover a company they truly believe in…

…and then invest 0.5% of their portfolio.

Suppose that company becomes a 100-bagger over the next twenty years.

Congratulations.

Your portfolio just gained about 50%. Nice.

But hardly life-changing.

Now imagine the same company had been a thoughtful 10% position.

That single investment would completely transform your long-term returns.

This is why investors like Charlie Munger, Nick Sleep or Chris Mayer have often held surprisingly concentrated portfolios.

Not because they enjoy taking unnecessary risk.

But because they understand where long-term returns actually come from:

Usually one or two exceptional businesses.

Not fifty average ones.

Of course, concentration also increases the risk of being wrong.

That’s why finding outstanding businesses matters so much.

If almost every stock is statistically mediocre, then quality isn’t a luxury. It’s the whole game.

What I take away from all this

This study doesn’t tell us which companies will become tomorrow’s winners.

If it did, investing would be easy.

What it tells us is something much more valuable:

Most companies will never become exceptional investments.

That means our job isn’t to find lots of ideas.

It’s to patiently reject almost everything until we find something that truly deserves our attention.

In other words, the default answer should usually be: “No.”

Only occasionally should it become: “This one is different.”

And that’s exactly why we need a demanding checklist.

We’re not trying to find good companies.

We’re trying to find companies that have a chance of ending up in that tiny 4%.

Those are two very different goals.

A quick disclaimer

Nothing in this article is investment advice.

The historical data show that most individual stocks disappoint over the long run, which is exactly why investing in individual companies carries substantial risk.

My goal is simply to understand what separated the rare long-term winners from the thousands of companies that never became one.

In the next article we’ll look at something that surprised me even more:

Why some of history’s greatest multibaggers came from industries that most investors considered boring, unpopular—or simply not worth looking at.