Navigating the stock market with the aim of outpacing market averages has proven to be a complex and often costly venture. A significant number of professional stock pickers struggle to deliver returns that consistently surpass their benchmarks. Research from S&P Dow Jones Indices highlights this challenge: only 19% of S&P 500 index constituents outperformed the average stock return from 2001 through September 2025. During the first half of 2025, just 44% outperformed the index, and the number dropped to 28% in 2024. Alarmingly, most S&P stocks underperformed the index in 13 of the last 24 calendar years, illustrating that the odds of selecting winning stocks have historically been less favorable than a coin toss.
For those who manage to identify a market-beating stock, the rewards can be substantial. Stock returns exhibit a unique trait known as positive skewness; while an investor’s losses are capped at 100%, the potential upside is theoretically limitless. This characteristic underscores a crucial aspect of stock investing: it is the outsized gains from a minority of stocks that elevate average returns. Anu Ganti, Head of U.S. Index Investment Strategy at S&P Dow Jones, articulated this phenomenon by noting that stock market returns are typically positively skewed, making the average return significantly greater than the median return.
To exemplify, since 2001, while half of the S&P 500 constituents experienced returns of 59% or less, extraordinary performances from a select few stocks pushed the average return to a striking 452%. A review of annual performance data over the past 24 years reveals that the average return surpassed the median return in 20 instances.
The challenge of active portfolio management increases when fewer stocks outperform the market. This is particularly pertinent for concentrated portfolios that may miss out on the few stocks that do excel. Warren Buffett, renowned as one of the greatest investors in history, echoed this sentiment in his 2023 letter to shareholders. Despite Berkshire Hathaway’s impressive performance relative to the S&P 500, Buffett readily acknowledged his missteps, attributing much of the company’s success to a small number of astute investment decisions over the years.
Buffett emphasized that significant gains often come from a handful of successful investments. This idea aligns with research from Arizona State University professor Hendrik Bessembinder, who found that most stocks have historically underperformed compared to Treasury bills. Bessembinder’s findings revealed that a mere 2.4% of companies accounted for all global wealth creation in the stock market between 1990 and December 2020, underscoring the difficulty in sustaining high returns over time.
Experts, including Buffett, suggest that the majority of investors would benefit from focusing their equity investments in S&P 500 index funds. This approach increases the likelihood of capitalizing on the exceptional few companies that significantly boost overall performance. According to Nicholas Colas, co-founder of DataTrek Research, while individual stock investments can offer potential rewards, the vast majority of market returns stem from a select few high-performing firms.
Ultimately, while there is ample merit in investing in specific companies believed to present strong value, those aspiring to surpass market averages should recalibrate their expectations.
