The Capitalist Distribution

by: Ken Caruso

At CGI Las Vegas I listened to a presentation by John Del Vecchio from Ranger Alternatives. John manages the Ranger short book and has a strong background in accounting forensics. Specifically, finding companies with low earnings quality before the market does and building “short” positions based on that information.

In his presentation he referenced some stats from a Blackstar Funds paper on the Russell 3000 index between the years 1983-2006.

Russell 3000 stats 1983-2006

  • 39% of stocks were unprofitable investments
  • 18.5% of stocks lost at least 75% of their value
  • 64% of stocks underperformed the Russell 3000
  • 25% of stocks were responsible for all of the market’s gains

Well, after reading this, an enterprising investor would obviously be diligently researching, looking for the 25%. If you only invest in those companies you are sure to outperform the market. Well not always…

What a difference a day makes

The paper also gives us a sampling of some of the best performing stocks during that time period and their performance after the peak:
On the way up


It would be interesting to see of the 25% that made up 100% of the gain in 1983-2006, how many companies would still be worth owning today. Looking at that list there are a couple. Of course, there are some that would have resulted in a permanent loss of capital and some that are not permanent losses yet, but for which the immediate future is not bright. Let's take a quick look at a couple…

General Electric (NYSE:GE)

If you had bought GE on 01/03/83 at its closing price of 91.75, split adjusted (48:1) each share would be worth around $670 today. I figure that's about 8.3% compounded annual gain. If you had sold that share before the market drop you would have approximately 3x that amount; somewhere around 12.5% compounded annually. Not including dividend payments. While GE is a mess today, it's fair to say you could have done worse things than buying a share of GE in 1983.

Microsoft (NASDAQ:MSFT)

If you had bought MSFT when they went public on 03/13/86 at $28, split adjusted (288:1) each share would be worth around $8,000 today. Around 29.3% compounded annually. Not including dividend payments.


This data reinforces a couple of points that I sometimes temporarily forget.

  1. If you own a sub par company because it was undervalued when you bought it, sell it when it reaches intrinsic value and take your profit. There is no reason to hold it afterward because it is likely to fall into the 64% that underperform the market. If you sell it and move on to the next value you will be on your way to outperforming the market.
  2. Paying a little bit of a premium for a a great business with a great moat and great management can pay off big time.
  3. I think people should really call 'buy and hold' 'due diligence, buy and due diligence hold, rinse repeat'.