Looking for a Needle in a Haystack

Needle in a Haystack
Needle in a Haystack

Vanguard Group founder John Bogle has accurately described the practice of stock picking as "looking for a needle in a haystack." Even if you are lucky enough to pick a stock that outperforms the market, there is no certainty of success, or even survival, in the future.

In their book, Creative Destruction,1 McKinsey & Company consultants Richard Foster and Sarah Kaplan analyzed the companies of the original S&P 500 Index from 1957. Their findings shown in Figure 3-3 revealed that only 74 companies remained on the list in 1997, and just 12 of them ended up with returns that outperformed the index for the 41-year period through 1998. "As the '80s passed and we made our way through the '90s, both of us observed that almost as soon as any company had been praised in the popular management literature as excellent or somehow super durable, it began to deteriorate," the authors wrote. "Searching for excellent companies was like trying to catch light beams; they were easy to imagine, but so hard to grasp," they concluded.

Figure 3-3

Figure 3-4 lists the ten largest bankruptcies from January 1981 through December 2013, reminding stock pickers of big companies gone bust. Lehman Brothers, Washington Mutual, GM, and MF Global Holdings were among the big companies that ultimately failed, and the number of bankruptcies significantly increased from 19,695 in 2006 to 47,806 in 2011, and stayed relatively high even in 2013 with 33,212 business bankruptcies.

Figure 3-4

    -1 Richard Foster and Sarah Kaplan, Creative Destruction: Why Companies that are Built to Last Underperform the Market-and How to Successfully Transform Them (New York: Doubleday, 2001).
Step 3Stock PickersNeedle in a HaystackCreative DestructionS&P 500John Bogle