Transcript: The world’s greatest stocks
This is an audio transcript of the Unhedged podcast episode: ‘The world’s greatest stocks’
Robert Armstrong
Today on the show, we are going to talk about the greatest stocks of all time, the super duper stonks. But before we begin, Robin, here’s a question for you. What is it that makes a great stock?
Robin Wigglesworth
Well, you know, I talk to lots of really clever investors all the time and I’ve learned how little I actually know. But I can tell you what’s a bad stock and I can tell you what makes a terrible stock.
Robert Armstrong
(Laughter) Tell me.
Robin Wigglesworth
Well, you know, GameStop, AMC, Bed Bath & Beyond — this is gonna get a lot of enmity in certain corners of the internet. But those are bad stocks. They’re kind of cults masquerading.
Robert Armstrong
Hype makes a bad stock. And I think what the stocks we’re gonna talk about today will prove your point in spades.
This is Unhedged, the markets and finance podcast from the Financial Times. I’m Rob Armstrong, coming to you from Unhedged world headquarters in New York City. I’m joined today by Robin Wigglesworth, who’s the head of the FT’s Alphaville blog. Do we still call it a blog, Robin? What do we call it?
Robin Wigglesworth
Yeah. We’re a blog in spirit and substance, I feel. I will say blog. It’s retro.
Robert Armstrong
Today we’re talking about the greatest stocks of all time. The reason we’re able to talk about this is because Hendrik Bessembinder, who’s quite a famous academic, has released a new paper which discloses the stocks that have compounded wealth at the greatest rate over time. And it’s a bit of a surprising list. To be absolutely clear about what we are talking about here, these are the stocks which over the last century have generated the greatest returns in per cent over the whole period. Am I getting that right, Robin?
Robin Wigglesworth
Yeah, that sounds right to me.
Robert Armstrong
OK, so number five, quite ironically, given its recent history: Boeing Co, a stock we associate with hilariously bad mistakes in its recent history — doors flying off of aeroplanes and all. The data goes back to 1934. And it has compounded. There’s so many digits here. One, two, three, four, 21mn per cent. Am I getting that right?
Robin Wigglesworth
Yeah.
Robert Armstrong
21mn per cent. That is an annual compound return of just under 15 per cent.
Robin Wigglesworth
That’s pretty incredible.
Robert Armstrong
It is pretty incredible. That is a big number. But what’s interesting to me about that, Robin, is if you have a stock that you love in your portfolio and it has a 15 per cent year, you’re not, like, doing backflips with delight. I mean, that’s a good year. But Nvidia lately is putting up hundreds of per cent a year. The lesson here is putting up 15 per cent a year again and again and again and again.
Robin Wigglesworth
It’s the stock market equivalent of the turtle, right? You compound that 15 per cent over a very long period, the numbers just start looking astronomical over a period, like 21mn per cent over frankly, less than a century.
Robert Armstrong
Yeah. Over less than a century by doing 15 per cent a year. And we were talking about this before. This is a bit the wisdom of people like Warren Buffett. You take a step back and you say, do I have a pretty good business here, a business that is in a position to generate in an average year, above average returns, and you just stick with it?
Robin Wigglesworth
I write a lot about, like, hedge fund managers that have, you know, made a bajillion per cent in any given year and it’s fun and it’s sexy and it’s exciting. But in reality, if you look at the people that have done best over time, they’ve just had lots of really good years over a long period of time. And that starts looking just, you know, godlike after 10-15 years.
Robert Armstrong
It’s the miracle of compounding and you don’t blow up, you don’t go to zero. Part of the magic of Boeing and the other four stocks we’re gonna talk about is continuing to exist is very powerful, you know.
Robin Wigglesworth
Don’t go to zero is my top stock market tip.
Robert Armstrong
And there’s an analogue to that, is if you’re a money manager, live a long time.
OK. Number four at 22mn per cent cumulative and just over 13 per cent a year, General Dynamics. This really pleases me because General Dynamics was actually one of my stock picks in the stockpicking contest this year. I picked it because I thought it was a reasonably cheap stock, grows reasonably well and the world is horrible this year, so I figured it’d be a good year to own an American defence stock.
Robin Wigglesworth
Probably would have been even better to own it 100 years ago.
Robert Armstrong
(Laughter) I know, I would, you know, if my grandfather had bought this in 1925, we wouldn’t be having this conversation because I’d be riding a polo pony in the south of France somewhere. You know, it’s interesting. So far, we have planes and General Dynamics is like submarines. And so we have two companies that make big machines.
Robin Wigglesworth
Weapons as well. There’s lots of weapons, right, yeah.
Robert Armstrong
(Laughter) Yeah, exactly. And speaking of big machines, you wanna give us the number three?
Robin Wigglesworth
Yeah, that’s another big machine company, though slightly less militaristic maybe, but that’s . . . This is a really weird one. But Kansas City Southern, a railway company that doesn’t actually exist any more. It was acquired a couple of years ago. But that made 36mn per cent cumulative return over the past century or so.
Robert Armstrong
Now, funnily enough, I actually understand Kansas City Southern better than I understand General Dynamics or Boeing because a railway, although it’s very expensive to put up and there’s a lot of logistical issues and so forth. It’s a natural monopoly, right? Once you own the rails, if you own a major artery of rail transportation for the 20th century in America, it’s gonna work out pretty well for you, right? You will have pricing power every year, right, because you have the most efficient and productive form of transportation and you have a natural monopoly on a certain route. So it makes sense to me that that would be a great stock.
Robin Wigglesworth
Yeah. If you can avoid bankruptcy along the way because they’re obviously massively capital intensive. I mean, railways famously went bust galore in the 19th century, but I guess the trick for Kansas City Southern was that they kind of timed it to a tee and were around a long time.
Robert Armstrong
And it’s . . . Yeah, time it to the tee and you survive. And, you know, a lot of these were the railways that went on to become successful were those that appeared in the ashes of previous bankruptcies, which in a lot of capital-intensive businesses, that’s true.
OK. Before we get to the top two, there’s a couple of questions I wanna raise. First of all, I’m very surprised. Although Kansas City Southern less so, I’m very surprised that all the businesses that we’re talking about so far are quite capital-intensive types of businesses.
When we talk about great stocks now, so often we talk about tech stocks because they are capital light. You have a piece of intellectual property that is, you know, that creates a kind of natural monopoly or a network effect. And the marginal cost of growth is zero and you go bananas. So it’s Microsoft, it’s Apple, it’s IBM, you know, slightly earlier. And I’m quite shocked that so far we’re talking capital intensive businesses right down the list.
Robin Wigglesworth
Yeah. Well, I mean, we do have IBM sixth on the list with a frankly a pathetic 17mn per cent return.
Robert Armstrong
Yeah. I mean, that is a bit embarrassing.
Robin Wigglesworth
But yeah, it does look really old world, capital intensive, not very techie or sexy.
Robert Armstrong
Part of that, of course, is just that point about staying around. Like anybody who’s gonna win this contest has to be around for 100-ish years or 80 years or whatever. You’re just, you need time to generate the massive returns. So actually, Bessembinder has a separate list in an earlier paper that talks about the most wealth in dollars created, the most total wealth rather than per cent return for the beginning. And that list is a lot techier. Although there’s an oil company at the top of that list, Apple and Microsoft are two and three on that list and IBM is number five. So there is truth to this idea that the dream stock for an investor is a network effect, low-capital intensity tech stock. But these businesses that last a long time in kind of metal-banging, oil-burning industries can actually do pretty damn well.
Robin Wigglesworth
Yeah. I mean, the trick is a bit like with life is just not to die, right?
Robert Armstrong
Yeah.
Robin Wigglesworth
I mean, so the database that Bessembinder used is the CRSP, the Center for Research and Security Prices, and that’s counted almost 30,000 US stocks that have been in existence over the past century. But the average lifespan of those companies is less than seven years. So that’s really low.
Robert Armstrong
Yeah. So it’s a very exceptional company that lasts this long. That’s point number one to make. But Bessembinder’s other great point, and I know you’ve written about this, is the incredible concentration in returns among stocks. You know we have this idea that stocks in general are a good investment. But in fact, it’s a handful of companies that make all the money. Am I getting that right?
Robin Wigglesworth
Yeah. No. So, I mean, this starts getting a bit mathematical. Like the mean outcome for a century of stock market data, basically the year what the stock market generated, is 22,000 per cent. So frankly, if you put money in an index fund in 1925, you would have made that like a bandit. But the median outcome — like what the average stock has done, or the median stock has done — it’s actually a loss of 7.5 per cent. Most stocks have actually lost money, and something like 90 per cent of them have actually done worse than if you put money in a bank account.
Robert Armstrong
-7.5 per cent is astonishingly bad, especially considering the kind of long-term expected return for the US stock market, what it’s done over a long time. And by the way, what a lot of other markets have also gravitated around this number is positive 7 per cent, sort of 6.75 to 7.25 per cent. So the average stock falls by 7 per cent but the stock index rises by 7 per cent, which tells you there’s like this small group of workhorses that is just dragging all the other crap stocks along.
Robin Wigglesworth
No, I mean, the old saying is stocks for the long run, but it’s not stock for the long run. (Robert laughs) Stock market does well, individual stocks suck, right? Well over half of all stocks that have ever existed in the United States have lost money. That’s incredible.
Robert Armstrong
It is incredible. In any case, back to our countdown. The number two on the list here is a company. If you asked me whether it still existed, I’ve heard of it. But if you asked me if it still existed and was a public company, I would have not known: Vulcan Materials Co, 39mn per cent, if grandma had bought it in 1925 and held it until the end of 2023. Vulcan, according to Wikipedia, here is the largest producer of construction materials, primarily gravel, crushed stone and sand. Now employs 12,000 people in over 400 facilities — Mexico, Canada, the US, etc. I mean, obviously the last few years haven’t been the heyday of this business, but for cripes’ sake, Robin, crushed stone. What is a more commoditised business than that?
Robin Wigglesworth
It is pretty wild, right, that the second-best performing stock in the US stock market’s history, it’s not like something that makes, like, AI superchips or cloud computing or whatever. It makes literally gravel. It makes rocks. It crushes rocks then sells it.
Robert Armstrong
One thing this tells me, though, to get back on my favourite theme of capital-light versus capital-intensive businesses is if you get a competitive advantage, even in a business that is structurally not that brilliant, that can work well, right? Like you get economies of scale or you establish these strong customer relationships or a brand or something like that. The fact that your business is not that great structurally might actually help you. In other words, it discourages competitors. Nobody is cutting your throat to get into the rock-crushing business, in other words.
Robin Wigglesworth
Yeah. I mean, if Silicon Valley only knew about the gold dust is hidden in gravel, maybe that would change but . . .
Robert Armstrong
(Laughter) I mean, you joke about Silicon Valley, but a business that’s a bit like this is Amazon’s retail business, which is like a low-margin, grind-it-out kind of business.
Robin Wigglesworth
Yeah, that’s a good point actually. It’s just . . . It’s the scale. If you can do it at scale or you can sell widgets online at scale, then it can be vastly profitable. You can do it for a very long time.
Robert Armstrong
Very long time. And you do a little better, you earn a bit better than your cost of capital and you just compound that baby out and, you know, to take your advice one more time, don’t die. Survive for 100 years just doing that and you’re gonna do OK.
So now I’m gonna ask our listeners to think to themselves. What is in fact the best compounding stock over the last 100 years? Sit back, relax, perhaps even smoke a cigarette while you’re thinking about what the best stock might be. Ladies and gentlemen, way better than all the other stocks, at 265mn per cent, 16 per cent a year for almost 100 years, Altria Group.
Robin Wigglesworth
Sorry. What the hell is an Altria Group?
Robert Armstrong
(Laughter) Yeah. Altria is what we used to call Philip Morris. We are talking about the Marlboro Man here. And you may have noticed that people have known that this company’s core product is poisonous for 50 years now or more, and still 265mn per cent. What do you make of that, that a nicotine provider, essentially, is our number one stock of all time?
Robin Wigglesworth
You know, it’s why Pablo Escobar made so much money. If you sell something that’s addictive, you know. Your customers might not live long enough, but you get a lot of them all the time. And if you do it legally, then that’s a good business.
Robert Armstrong
(Laughter) Hey, you put that very well. And I wonder, unlike the others, I guess Boeing has a great brand. Marlboro had one of the strongest brands. Pepsi and Coke are on the list. Hershey is on the list. So a good brand is really powerful. I think that’s part of the story here, too. You make an addictive drug, you brand it really well and you don’t go out of business for 100 years and you’re gonna do pretty well. I think that’s part of the lesson.
Robin Wigglesworth
Yeah. I mean, there are lots of other tobacco companies on this list as well, like Universal and UST, but Philip Morris or the artist formerly known as Philip Morris just smashes everything else out there.
Robert Armstrong
Just absolutely crushes everything else. Now, you are probably the person in the entire world best placed as a great expert on passive investing and an author of a book on passive investing. You’re the best-placed person in the world to answer this question: what lesson do we take from Bessembinder’s work?
What we’ve learned so far is all the returns accrue to a few stocks and most stocks suck. Now, do I conclude from that A, I’m gonna spend my life as an investor in stocks trying to find those really good stocks so I don’t have to own all those terrible ones? Or do I give the whole thing up as a bad job searching for needles in haystacks and trying to predict the future and just own all the stocks at once and trust — you don’t even have to trust — and rest assured that somewhere in that pile of stocks I own will be these gems?
Robin Wigglesworth
Yeah. I mean, that was basically Jack Bogle’s verbatim quote that, you know, stop looking for golden needles. Just buy the entire haystack and relax. And I do think what’s so fun about Bessembinder’s papers are that they are this like Rorschach test for the finance industry, because some people do see it as, you know, see these papers, see the skew, the distribution of returns and think, yes, obviously indexing, obviously passive is the way to go. And yes, I’m hardly entirely objective here given that I love passive investing, but that’s what I see this, as a strong contributing evidence to. But there’s a map of evidence . . .
Robert Armstrong
Right. Show the evidence to a stockpicker.
Robin Wigglesworth
Oh God, yes, they will say that frankly, you can basically, if you buy 100 stocks, 99 per cent of them, like 99 of those 100 stocks can suck. You can lose all your money on them. If you manage to get one of these mega supercompounding superstonks, then your career is made.
Robert Armstrong
All right listeners, Unhedged is gonna take a cigarette break right now and we’ll be right back for Long and Short.
Listeners, we’re back. And this is Long and Short, that portion of the show where we go long things that we like and we go short things that we don’t like. Robin, are you long or short something?
Robin Wigglesworth
I am extremely short something.
Robert Armstrong
Ahh, conviction short. I love it. Hit us.
Robin Wigglesworth
Yeah. So I rattle off my ETFs and I think passive investing is cool and interesting. I’m a bit sad that way. But somebody’s now launched an ETF that all it does is go long a single company called MicroStrategy. And it does it with leverage. And MicroStrategy is like basically a leveraged bitcoin fund. It’s basically a software company with a founder, Michael Saylor, loves bitcoin so much that he borrowed more money and basically used all the company’s money to buy tonnes of bitcoin. So it’s a leverage ETF on a leveraged company. And it is, I think, the moment the ETF industry’s jumped the shark. It’s just insane. For me, the fact that some regulators have blessed this boggles my mind. This is the dumbest thing I’ve seen for many years.
Robert Armstrong
I’ve got four words for you in response to that, Robin: have fun staying poor.
Robin Wigglesworth
(Laughter) I can guarantee you anybody trading this or holding this for a long time is gonna get poor. These products, these leveraged single-name ETFs are the most prodigious capital incinerators the finance industry has ever invented. (Robert laughs) They literally make . . . They make, like, CDOs squared seem like good investments.
Well, I was calculating that you would have made, you would have lost less money investing with Bernie Madoff than investing some of these ETFs, and we still produce them.
Robert Armstrong
On that very note, I am going to go long spectacular and public incompetence. I am inspired to take this position by the performance of Raygun, the Australian breakdancer who seemed to have tricked her way onto the Australian breakdancing team, and she is a hilariously incompetent breakdancer and seems to have set herself up for a lifetime of endorsement and branding deals.
So the trick in life, Robin, we were talking about how the trick in life is to survive. I don’t think that’s exactly right. I think the trick in life is to fail, but at the highest possible level. And that is the key to success.
With that in mind, listeners, we will fail spectacularly again in your feed next week.
Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhecz. Cheryl Brumley is the FT’s global head of audio. Special thanks to Laura Clarke, Alastair Mackie, Gretta Cohn and Natalie Sadler.
FT premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com/unhedgedoffer.
I’m Rob Armstrong. Thanks for listening.
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