Finding companies that compound for decades has become the ultimate investment strategy. It’s also one of the hardest. The trouble is hindsight tends to obscure how difficult it may be.
A recent study by Henrik Bessembinder offers some insight into the difficulties investors face investing in compounders. He studied 25,775 stocks between 1973 to 2020 to find the most persistent “winners” of the bunch.
Bessembinder looked for companies that grew 5x, 25x, 125x, and 625x after its stock price reached a low point. Returns included reinvested dividends when applicable.
He found that:
Of these, 11,442, or 44.39%, achieved a 5x multiple relative to a prior low point at some time during the 48-year sample period. Among those that reached a 5x multiple, 3,306 stocks went on to achieve a 25x multiple relative to the same prior low point. The stocks that reached 25x comprised 12.38% of the full sample and 28.89% of those that achieved a 5x multiple. A total of 955 stocks achieved a 125x multiple. The stocks that reached 125x comprised 3.71% of the full sample… The stocks that reached a 625x multiple comprised 1.05% of the full sample…
In addition, 29% of the stocks that grew 5x went on to hit 25x. Of those that reached 25x, 29% hit 125x. And of the 125x, 28% hit 625x! At each hurdle, almost a third of the compounders went on to hit the next hurdle.
There are few things we can learn from his study. Continue Reading…