Probability of Beating the S&P 500 Index

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What I wanted to understand was if I threw darts at random at stocks in the SP500 index, how likely was I to pick stocks that beat stocks by at least 10% CAGR.

Questions to answer:

  1. What’s the percentage of stocks that beat the index by 10% as a whole vs. segmented by sectors?
  2. How does the distribution of returns look like?
  3. What’s the top stocks with consistent beats throughout it’s history

Question 1: Percentage of Stocks that Beat the Index

The percentage ranges between 30% – 40% of stocks that beat SPX by at least 10%. This number gets cut by half to around 15% if you’re looking to beat the SPX by at least 25%.

Y-Axis (Left) Blue Line: % of stocks that beat the SPX by at least 10% CAGR over a rolling 5 year period.
Y-Axis (Right) Orange Area Line: # of stocks that I’ve included in the SPX
* Analysis only includes stocks currently listed in the SPX. Therefore, there is survivorship bias.

But if you’re looking to get the best bang for your buck at a sector level, Consumer Discretionary, Health Care and IT are the sectors to focus.

Another important note is that health care remains the most consistent in % of stocks beat across the years. It had a slight decline from 2005 and a huge drop due to the 2008 recession but has picked back up since. My speculation here is that health care will continue to be a strong sector to invest in due to the aging population and a shift in sentiment due to the impact of covid-19. More on my research on the aging population here.

The consumer discretionary has gone through lots of boom and busts through the years. I haven’t researched this sector enough to provide a comment to why, but I’ll add it to my bank of questions to answer in the future.

However, if I were to guess, it’s because the growth of consumer discretionary is explained by it’s name; ‘discretionary’. Therefore the growth follows the sentiment of the end consumer. When there’s fear, consumers stop spending and vice versa.

What is surprising is that from 2015 to 2020, the % of stocks that beat the index had a steep decline. Other than a flash crash of 2015, I’m not sure what else happened. As a note to self. a tool that tracks the news for all major booms and busts would be a great idea and I’ll incorporate this to the OKR tool in the future.

The IT had a huge boom between 1990 to 2000 which makes sense because as we know from history, 00 was the dot com bust. But even after the bust, 2005 to now has been a consistent growth period. My speculation here is that it’s due to the rapid dependence on technology. With the growth of smart phones, web2 and AI/ML, my belief is that this trend will continue to grow. The question here is how web3 would impact the markets.

Question 2: Quick Look at Distribution

At an index level, its primarily right skewed which is something that is clearly known as the market has been increasing on average 11% per year.

x: 5 year CAGR returns from 1985 to 2021
y: # of stocks per year

Though consumer discretionary, healthcare and IT had the same distribution of stocks beating the index at 46%, the average returns are not the same.

Question 3: Stocks with Consistent Beat vs. Index

I wanted to see a short list of stocks that consistently beat market by 10%. But to further ensure I’m comparing apples to apples, I’ve only included stocks with at least 10 years of history.

Here are the top 20:


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