Key Stock Investment Facts and Tips

Stocks, especially in the US, have a few important facts: most underperform their index, night trading impacts prices, and valuation affects long-term returns.

### 10 Critical Facts About Stocks Every Investor Should Know
* 📈 " The average stock in the US underperformed its own index, with **almost two-thirds of US stocks underperforming the Russell 3000**.
* 🌙  A significant portion of stock price movements occur overnight, known as the "**night effect**," with the **overnight return far outstripping** the return during the day when markets are open.
* 💸  Stock splits do not fundamentally affect stock returns but are done to make the stock more marketable by **subdividing shares into smaller units**.
* 📊  The liquidity of a stock, which is primarily determined by its market capitalization, significantly impacts the **bid-offer spread**, with **large-cap stocks having tighter spreads**.
* 📈  Stocks become less unpredictable over long periods of time due to the **steady upward drift of prices** driven by **increasing company profits**.
* 🎯 " When stocks are expensive, they tend to **underperform over the next 10 years**.
* 📊  Markets are quite efficient, and stock prices move sharply when **expectations are surprised**, either to the **upside or downside**.
* 📅  The **median age of stocks** in indices like the S&P 500 is decreasing, with stocks spending **less time in the index on average**.
* 💸  40% of US stocks actually **destroyed wealth over their entire lifetime**, highlighting the risk of having a **concentrated stock portfolio**.
* 🤔  Legendary investor Howard Marks suggests asking critical questions when evaluating a stock that seems like a **bargain**.

if you invest in stocks, there are some things it's critical to understand. So, in this video, I'll go through some of the important but lesser-known facts that I think you should know to help you get the best returns from investing. This video is sponsored by Trading 212, a UK commission-free investment platform. Let's begin with some facts about stock returns. Now, of course, this is the reason why we invest in stocks in the first place. They offer good attractive long-term return compared to other asset classes, and there are various ways to measure this. I think an interesting one is for the entire lifetime of the stock from the day it's first issued through an initial public offering all the way up to the day that the stock effectively dies. It could be that the company goes bankrupt or it gets merged into another company. But there was an interesting study which looked at these lifetime returns and compared them with an index. So, for example, if we look at the Russell 3000 index, which is the 3,000 largest US stocks, the really shocking fact was that

the average stock in the US underperformed its own index. In fact, almost two-thirds of US Stocks underperformed the Russell 3000. You might be thinking, how's that possible? Well, it turns out that there's just a small group of stocks which typically generates really outsized returns, and they're the ones that drag the entire index upwards. So, in this distribution of returns, you can see beside me, notice that 6.1% of the stocks, a tiny minority, generate really outsized returns, and those outsized returns are 500% or better. And this is one of the reasons why it's difficult to do stock picking, because you have to choose those really rare stocks that outperform a lot. And this is also why index investing usually works quite well, because if you do buy the entire haystack, as Jack Bogle put it, then you'll find those needles in the haystack alongside all the other stocks. Another fascinating fact about stocks is that a lot of the stock price movements occur overnight. So, beside me here, you

can see a couple of weeks of trading prices for Apple. I notice that the stock price does move during the day, of course it does, but sometimes it gaps overnight, and that actually accounts for a lot of the overall movements, certainly in the US market. Now, this is called the night effect. It's not fully understood, but if you actually break down the returns of the S&P 500, say the index, then you can see that a lot of the return which is generated is this overnight return. In fact, that far outstrips the return you get in a day when markets are open. Now you might think, Oh, I've come up with a really good strategy. I'm going to buy stocks as the market is just about to close, and then I'll sell them just as markets open the next day, and that way I can bag these outside returns. Well, that's exactly what an ETF was designed to do. It did this using Futures contracts, and it did it for the S&P 500, and it did it for the Russell 2000, which is a US small-cap index. However, as often

happens when you take one of these theoretical results and tries to implement it with an actual strategy. The outperformance disappeared overnight. You might say and after just one year of trading, the ETFs were wound up and they actually underperformed formed very considerably. During a period when the S&P was generating double digits, they lost about 5% each. However, if you do see that your stock has moved overnight and it's moved a lot, don't be surprised because that's completely normal. Now, sometimes people ask me what happens if a stock split does that affect the returns on the stock and the answer is not really. I mean fundamentally you'd expect it not to happen. It doesn't really change any of the profits that the company generates or anything to do with the quality of the company. All it means is that its shares are subdivided into small units which are cheaper. And the reason why companies do this is that after a period of blistering stock price rallies then it can be that the stock

price grows to thousands of dollars or thousands of pounds, and that's out of the reach of many retail investors. So, to make the stock more marketable, it's sold in these smaller chunks. For example, Nvidia's recently done a 10-for-one stock split because of its huge rally over the course of 2024. Now, for Summer's PhD thesis, I found this graph which shows you what happens to a stock. This tracked many stocks, and they were all tech stocks. It looked to see what would happen to the stock splits around the announcement date and on the date when the stock split actually happened. What's interesting is that there was a short-term blip in return, a blip upwards. However, after the excitement died away, there is no long-term effect, which is what you'd expect given that it hasn't really changed the company at all. Why does this happen? Well, one of the reasons is, according to the author, that it creates greater liquidity in the stock because it trades in smaller chunks, more shares.

turn over and that can push up the share price. Another effect is the signaling effect, which is that if a stock is split, well, that shows it's a successful stock. It's rallied so much that it's become super expensive. So, by doing one of these share splits, it signals that the company is a successful one. However, it doesn't mean that the company will continue being successful. For example, if we look at Tesla's share price, you can see two share splits here. And the first one was during a period of incredibly rapid growth in Tesla's share price. The second stock split, however, came just before a period of huge weakness in Tesla's share price. So, frankly, I don't think these share splits matter at all. As a fundamental investor, I don't really care if it's 10 stocks or one stock. I really think that valuation is a much more important measure. Now, one factor that is incredibly important if you're trading a stock or even an ETF is how liquid that stock is. And that's because it affects the bid-offer spread.

when you buy a stock, you buy it at a high price, and when you sell it, you sell it at a lower price, and the difference between those two in percentage terms is called the bid-offer spread. Now, for some stocks, that spread's huge, for some of them it's very tight. Well, the most important factor is the market capitalization of the stock. That's the number of shares multiplied by the share price. In fact, it's the number of free-floating shares, but that's approximately correct, and that's true for any market. So, for example, if we look at the FTSE 350, which you can see beside me on the x-axis, we've got the market capitalization ranging from tiny companies all the way up to the biggest company on the UK Stock Exchange, which is Astrazeneca currently. And it's actually a log plot on both axes. But notice this negative relationship: large caps have tighter bid-offer spreads, they're more liquid, the difference between the buying and selling price is much smaller. So, if you buy and sell those, you don't have to

pay so much as you cross the bid offer spread, whereas for small caps the bid offer spread is absolutely huge, and if you trade those a lot, then you're going to lose a lot of money. So, liquidity is important because if you stick to liquid large cap stocks and funds, then that way you won't lose so much money as you trade in and out. Now, as a long-term investor, I don't do that much anyway, but certainly it's something to be aware of. The final return fact that we'll look at is to do with predictability. Now, you might think that stocks are very unpredictable; however, what's kind of interesting about stocks is that they become less unpredictable over long periods of time. The reason for that is to do with the way that stock prices move. There are two things effectively superimposed on one another; one of them is a steady upward drift, and the driver of that is that as the profits of the company increase over time, that drives the price higher. Overlaid on that a huge

daily price fluctuations. We call that volatility. So, what we have is an upward drift with huge fluctuations superimposed. Now, if you're a short-term trader, what you'll see is the daily flipping around of the price. And if you bet on that, it is kind of like betting on a coin flip. And it is also quite random, that volatility. However, if you invest over the long term, what you actually earn is the drift with some of the volatility overlaid on it. Now, that's certainly true for an index fund, which does tend to drift upwards. For individual stocks, that isn't always true. They can drift downwards, and they can go bust. So, for example, if we look at the S&P 500 and we look over a one-year period (that's the top graph you can see beside me), and these are all the one-year periods since 1871. Notice how the distribution is quite broad, it is quite uncertain. Whereas if we look over 10-year periods, notice how the distribution of returns is much tighter. There's much less uncertainty. And that's

because of this upward drift that's dominating the volatility, and it increases our return long term. The volatility matters less, and the drift matters more. Another good side effect of that upward drift dominating volatility is that the probability of making a loss decreases over longer periods of time, at least for indices. So, over a one-year period, the probability of making a loss is about 1 and three, whereas over a 10-year period, the probability is much lower of making a loss. It's something like 11%. Now, today's video is sponsored by Trading 212, a commission-free investment platform. I use it for my fund portfolio. I've been using it for some time now, and it's certainly very competitive. It has no platform fees at all for its sir. That's very competitive, of course, and it also charges no commission for the trades that I do. Furthermore, if you do trade in foreign currencies, it has a very low FX conversion fee of 0.15%. Now, if you want to automate your investing, you can set up things called

pies these are like mini portfolios within your portfolio, and you can easily rebalance those with just one click. You can also publish them and share them with other people, or look at other people's portfolios and draw inspiration from them when building your own. Now, if you're not ready to invest, if you want something safer and you want a cash Isa, for example, Trading 212 has introduced cash Isas. Furthermore, they offer very competitive rates, and the interest is paid daily. Customers of Trading 212 can also benefit from their new Trading 212 card. The way that works is that the money that you spend on the card comes out of your Trading 212 Invest account. That's like your general investment account that comes out of the free funds, so none of the investments will be sold as you spend. You can also use it for online purchases or POS transactions, and of course ATM withdrawals. You can withdraw £400 a month free, and then there's a 1% fee after that. You can even use it abroad, and they'll still charge that very

competitive 0.15% conversion fee. If you've already got Euros, say in your account, then it'll come out of those Euros if they exist in your invest account. Now, if you're a new customer of Trading 212, there's a special offer where you can claim free fractional shares worth up to £100. All you have to do is create and verify a Trading 212 account, make a minimum deposit of a pound, and use the promo code, which is my first name, Romen, or use a link in the description below. Now, let's look at some facts about companies. Now, I've heard it said that as you get older, one thing you notice is that people like teachers and police look younger. I've certainly noticed that myself. However, what's interesting at the moment is that if you look at indices like the S&P500, is that stocks are getting younger as well. For example, if you looked at the top 10 stocks in the S&P 500 in the year 2000, the median age of the companies was almost a century.

was 85 years. Whereas by 2018, the average lifetime of those top 10 stocks had reduced dramatically to 33 years. And it's not just the age of the top 10 stocks which is shortened, it's also the amount of time that stocks spend within the S&P 500. Because its content and not static, they changed all the time either because these stocks are no longer eligible for the S&P 500 if they stop being profitable, for example, or because the company's market capitalization has shrunk because the company's not doing very well, or perhaps the company's actually gone bankrupt. So whereas in the early 1980s, the average company tenure on the S&P 500 was around 30 years, that's now fallen to around 20 years on average. Now certainly for the S&P 500, it's a very innovative index. There are lots of technology stocks in there, and they tend to be very disruptive. They jostle other stocks out of the way, and this sometimes encourages people to try and find those real

winners. But as we saw previously, that's actually quite difficult because these are a tiny subset of the stocks in an index, and they're very difficult to identify. And another shocking fact: if we look at the lifetime return from birth to death for US companies, is that 40% of stocks actually destroyed wealth over their entire lifetime. In other words, the price at which they were issued was above the price at which they were when they were taken out of the index or when they ceased to exist. So, the danger of having a concentrated stock portfolio, which is actually the title of the research from which this table was taken, is that you could just be unlucky. In fact, the probability of choosing a dud is much higher than choosing one of those big outperformers. In fact, it's worse than that because the single stocks. What actually could happen is you could suffer a catastrophic loss. And according to this paper, their definition is that you suffer a 70% peak to trough loss with no significant recovery. And the catastrophic loss rate for the Russell 3

,000 is a fairly steady 10%. It fell during the period after the global financial crisis when the interest rates in the US fell to zero, but my expectation is that that's going to pick up again now that interest rates have gone back to around 5%. Now I'm not saying you should never try and choose single stocks to try and beat the market, but I think it's always good to know these stats in order to understand the risks you're taking, but also to calibrate your expectations about success. But if you are going to be buying single stocks or even stock indices, I think it's incredibly important to understand valuation. And for stocks, one of the great benefits is that they do have ways of measuring how expensive or cheap they are, usually relative to one of their fundamental balance sheet statistics like their profits, or perhaps their book value, or perhaps their cash flow. For example, one measure is called the EXs Cape yield, created by the Nobel Prize winner Robert Schiller, and there's a fairly well

documented relationship between the S&P 500's returns and its valuation. When stocks are expensive, they tend to underperform over the next 10 years. But in order to see that effect of valuation on return, you have to wait a long time. If we look at the cape valuation versus the one-year return on the S&P 500, and this is for the one year following that valuation, the relationship is very weak indeed. Whereas if we extend that period to 10 years, notice the positive slope of the graph. If you buy the S&P 500 when it's expensive, usually the returns are lower. If you buy it when it's cheap, the returns are usually higher. So if you are a value investor, the take-home message is that you should also be a patient investor because it may take markets some time to realize that the stock was indeed cheap. And then the final point is one about information, and the point here is that markets are quite efficient. If everybody knows something about a company, then that's already in the price.

so sometimes people ask me, Look, the earnings for this company were just incredible, but if that was expected, then it won't probably affect the price much. In fact, the price of the stock could actually fall on those incredible earnings results. And that's because the expectation was that they'd be even higher. So really, what moves markets, and particularly moves them sharply, is when those expectations are surprised, either to the upside or to the downside. That's true for earnings results, it's true for macroeconomic data, it's true of any information which feeds into the price of an asset. And there are some great quotes about this from the legendary investor Howard Marks. And these are questions you should probably ask yourself if you see a stock which seems like a bargain. The first question is, why would the seller of the asset be willing to part with it at a price from which it will give you an excessive return? Is it because they really like you, or is it because perhaps you haven't factored in some risk which they've seen, but which

you haven't and be a bit humble. Do you really know more about the assets than the seller does? Because that's what you're assuming when you see a bargain. And then maybe a third question would be if it is such a great proposition, why hasn't someone else snapped it up? If you can come up with convincing answers to those three questions, well, maybe it is a bargain. So I hope those 10 facts about stocks were useful for you. I think it's important to understand the basics before you launch into a portfolio, particularly for single stocks. Personally, I only dabble with them. I tend to do that in my fund portfolio. My core is very much index funds, and that's simply because I don't think I can outperform markets. I think the probability of that is quite low, but it is fun. And that's why it's called the fun portfolio. Now, don't forget our offer from Trading 212. Pensioncraft viewers can claim free fractional shares worth up to £100. Just create and verify Trading 212.

account. Make a minimum deposit of a pound and use the promo code, which is my first name, Romen. That's R-A-M-I-N. Or use a link in the description below. And as always, thank you for listening.

10 Facts They Don’t Tell You About Investing In Stocks

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Stocks offer attractive long-term returns, but the majority of US stocks underperform the Russell 3000 index, with only a small percentage generating high returns.

A significant portion of stock price movements occur overnight, known as the "night effect," which far outstrips the returns during open market hours.

Attempting to exploit this effect through ETFs and futures contracts has proven to be unsuccessful in the long term.

Stock splits do not significantly affect stock returns or the company's fundamentals, as they simply subdivide shares into smaller, cheaper units.

The Impact of Stock Splits on Market Performance

Stock splits, like the 10-for-one split done by Nvidia, may cause a short-term increase in return and signal a successful stock, but ultimately have no long-term effect on the company's success.

The primary reasons for this are the creation of greater liquidity in the stock and the signaling effect of a successful company.

The liquidity of a stock, determined by its market capitalization, significantly affects the bid-offer spread, with larger market cap stocks having a tighter spread, making them more liquid for trading.

The Impact of Liquidity and Predictability on Stock Investments

Liquidity is crucial for minimizing losses, especially when trading small cap stocks with a large bid-offer spread.

Long-term investment can reduce the impact of volatility and capture the upward drift of stock prices, leading to more predictable returns.

Trading 212, a commission-free investment platform, offers competitive fees and is endorsed for automated investing.

Trading 212's New Features and Special Offer

Trading 212 now offers portfolio pies for easy rebalancing and sharing, as well as cash ISAs with competitive daily interest rates.

The new Trading 212 card allows users to spend money from their investment accounts without selling any assets, with the added benefit of using it for various transactions and withdrawals.

New customers can also claim free fractional shares worth up to £100 by following a simple account creation and verification process.

The S&P 500 has seen a dramatic decrease in the average lifetime of its top 10 stocks, as well as a significant reduction in the average company tenure on the index, indicating a trend of younger and more dynamic companies in the market.

The Risks of a Concentrated Stock Portfolio

- 40% of US stocks have actually destroyed wealth over their lifetime, making it difficult to identify successful ones.

- The probability of choosing a failing stock is higher than choosing a successful one, with a steady 10% catastrophic loss rate for the Russell 3000.

- Understanding stock valuation is crucial, as expensive stocks tend to underperform, while cheap stocks offer higher returns, although patience is required for the market to realize their value.

The Impact of Earnings Expectations on Stock Prices

Stock prices can actually fall despite incredible earnings if they don't meet even higher expectations.

Howard Marks raises important questions about buying bargain stocks and the level of knowledge compared to the seller.

Understanding the basics of stocks before building a portfolio is crucial, with a reminder about the offer from Trading 212 for free fractional shares.