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Let me break this to you gently: Stocks are typically lousy investments. Most provide an excellent way to vacuum up society's spare change, but should not be confused with anything that would actually make you much money.

Yes, I know this contradicts conventional investment wisdom. But hear me out.

A recent working paper, "Do Stocks Outperform Treasury Bills?" by Hendrik Bessembinder, a business professor at Arizona State University, looks back on nearly nine decades of U.S. financial history. It concludes that about 58% of stocks fail to produce better returns over their lifetimes than a series of one-month Treasury bills. Most of the time, most stocks produce no excess return or actually lose money compared to ultra-safe, low-yielding Treasury bills.

How has a stock market populated by such a dismal crop of underachievers been able to produce so much wealth over the years? Bessembinder attributes it to "positive skew." To put it more plainly, large gains tend to occur more often than big losses. So, yes, most stocks are sad sacks, but their losses are typically tiny. By contrast, a handful of big winners cranks out huge gains.

The numbers are mind-bending. Bessembinder found that less than 4% of the 26,000 stocks listed on major U.S. exchanges were responsible for all the $32 trillion (U.S.) in wealth created by American equities between 1926 and 2015.  A mere 86 stocks generated half the market's total return. Investors should meditate on those numbers, and let me suggest a few implications.

The first is that today's market may not be that untypical. A tiny handful of so-called FANG stocks—Facebook, Amazon, Netflix and Google—have generated much of Wall Street's gains in recent years. This is usually cited as a sign of decaying market conditions. But, in fact, such a heavy reliance on a small group of winners may not be that unusual after all.

This brings up another point: You have to be very smart or very lucky to buy big winners early on. The 86 blessed stocks that have driven the market for nearly a century are less than one-third of 1% of all the stocks listed on U.S. exchanges during that period.

The ugly math of stock selection confronts investors with a difficult choice. You can, if you feel cocky, go hunting for the next great overachiever. But the odds are against you. For every General Motors, there's a Packard. For every Barrick Gold, there's a Bre-X. For every Facebook, there's a Myspace. Given Bessembinder's numbers, there are about 300 flops or ho-hum mediocrities for every big winner.

Confronting those long odds, most of us should hedge our bets. Since superstars are so rare, it's best to invest in a broad index that ensures we get a piece of whatever champion stocks emerge.

Most proponents of passive investing stress the efficiency and low costs of buying cheap index funds. But Bessembinder's findings suggest that the inclusivity of these funds is just as important. It at least ensures you don't miss out on the few overachievers that generate the bulk of the market's return.

Put the capture of big winners and low costs together—and index funds rock. Over the past three years, less than 20% of Canadian equity funds have been able to surpass the S&P/TSX Composite Index, while only about 2% of the U.S. equity funds for sale to investors in this country have beat the S&P 500.

This dismal performance by actively managed money is nothing new. Mutual funds in most countries lag behind market benchmarks. So do most hedge funds, run by the self-proclaimed smartest guys in the room. The problem isn't that money managers are incompetent. Neither is it simply a matter of the fees they charge. They come up short mainly because finding big winners is far tougher than most people realize.

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