Can Investors Find the Few Stocks That Create Most Market Wealth?

Jim Cramer’s Optimistic Interpretation of Hendrik Bessembinder’s Research—and Why the Evidence Still Favors Diversification

Abstract: Hendrik Bessembinder’s research shows that a remarkably small number of stocks account for most long-term market wealth creation. Jim Cramer interprets that concentration as an opportunity to identify exceptional companies, while Bessembinder emphasizes the enormous cost of failing to own them. Cramer’s FANG recommendation demonstrates that visible, established companies can still produce extraordinary returns, but it does not show that investors can select such winners consistently, hold them through severe declines, and avoid plausible alternatives that underperform the market. The evidence supports stock picking as a possibility, but broad diversification as the more reliable strategy.

Jim Cramer recently highlighted Hendrik Bessembinder’s paper, Which U.S. Stocks Generated the Highest Long-Term Returns? The paper shows that a remarkably small number of stocks generate most long-term stock-market wealth.

Bessembinder treats that concentration as a powerful argument for diversification; Cramer treats it as an invitation to select exceptional companies.

The Bessembinder Evidence

Bessembinder analyzes 29,078 U.S. common stocks contained in the CRSP database from December 1925 through December 2023.

The analysis reveals:

· 51.6 percent of stocks produced negative returns over their listed lifetimes.

· Seventeen stocks produced cumulative returns exceeding five million percent.

· Yet the 17 most spectacular stocks produced an average annual compound return of only 13.47 percent. Their almost unimaginable final returns resulted mainly from compounding over exceptionally long periods.

· Nvidia recorded the highest annualized return among stocks with at least 20 years of data, at 33.38 percent.

These results build on Bessembinder’s earlier and more important paper, Do Stocks Outperform Treasury Bills? That study found that four out of every seven U.S. common stocks produced lifetime buy-and-hold returns below those of one-month Treasury bills. Even more strikingly, the best-performing 4 percent of listed companies accounted for the entire net wealth created by the U.S. stock market since 1926. The remaining 96 percent, taken together, merely matched Treasury bills.

Cramer’s Interpretation

Cramer accepts Bessembinder’s central empirical finding—that most market wealth is generated by a small number of stocks—but still maintains that a portion of an investment portfolio should be placed in individual stocks.

He argues that the extraordinary winners were not necessarily obscure companies discoverable only through luck. Many were familiar businesses—including Coca-Cola, IBM, Boeing, Deere, and Johnson & Johnson—with recognizable products, strong franchises, and long records of success. Exceptional companies, in Cramer’s view, are often visible to consumers and investors before all their gains have occurred.