The math behind long-term stock picking is brutal. 71% of individual stocks fail to match the market return over rolling 10-year periods, and per Hendrik Bessembinder’s research at Arizona State University, only 4% of companies from 1926 to 2018 actually created net wealth relative to T-bills. Everything else, in aggregate, was a wash or worse.
That backdrop matters more than ever in today’s environment. The SPDR S&P 500 ETF Trust (NYSEARCA:SPY | SPY Price Prediction) has returned 251.82% over the past 10 years, and CPI runs above the Fed’s 2% target. Beating the index is harder than it looks.
The Good News: Stocks That Outperform Typically Share Common Traits
On a recent episode of The Compound and Friends, former Janus analyst Matt Ancrum, hosted by Josh Brown and Michael Batnick, walked through how to find 100-bagger stocks. 84% of the top 50 wealth-creating companies were “high quality” from the start, defined as achieving 15% or higher returns on tangible assets sustained over a decade or more.
Ancrum’s tiering is simple:
- 15% returns on tangible assets: decent
- 20%: good
- 25%: great
- 30%+: exceptional
Ancrum argues that businesses that can maintain 15%+ returns on tangible assets are structurally better than almost all companies: “These are companies that don’t regress toward the mean. They don’t.” The reason, in his view, is “such a strong enduring competitive advantage” that compounds margins year after year.
The “Weirdest Efficiency in the Market”
Brown referenced Jeremy Grantham’s firm, GMO, calling the quality factor’s risk-adjusted profile “the weirdest efficiency in the market”. Higher returns paired with lower volatility break the traditional textbook idea that if you want higher returns, you have to take on higher risk. Research from Morgan Stanley and Atlanta Capital found that high-quality companies outperformed low-quality companies 3-to-1 over 35 years.
As one example, the iShares MSCI USA Quality Factor ETF (NYSEARCA:QUAL) screens for high return on equity, stable earnings growth, and low debt. It has returned 270.52% over the past 10 years, narrowly outperforming the broader index.
Why Commodity Businesses Rarely Outperform Over the Long-Term
Ancrum used Cheniere Energy as a counterexample. Even a commodity business with a strong moat can fall short because margins depend on external prices rather than internal management control. The framework prioritizes situations where “management has the most control” over unit economics. A pipeline operator can dominate its niche and still see returns whipped around by spot LNG prices that are completely out of the company’s control.
Boring, Underpriced, and Held for Decades
Batnick’s framing of why these names stay cheap is that they are “so boring that they’re underpriced.” The path to owning a 100-bagger usually runs through years of holding a business with high returns on capital. Everything about that strategy looks unremarkable in the day-to-day results, but the compounding that happens over the course of years can be truly astonishing.
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