Best of: the world’s greatest stocks

0:28Hey, listeners. This is Jake. I produce the show. Pushkin. 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? 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. I can tell you what makes a terrible stock. Tell me. Well, GameStop, AMC, Bed Bath & Beyond, this is going to get a lot of eminently in certain corners of the internet, but those are bad stocks.

1:13They're kind of cults masquerading. Hype makes a bad stock. And I think what the stocks we're going to 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? Yeah. We're a blog in spirit and substance, I feel. I always say blog. It's retro. Today, we're talking about the greatest stocks of all time. The reason we're able to talk about this is because Hendrik Bessenbender, 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.

2:10And 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 percent over the whole period. Am I getting that right, Robin? Yeah, that sounds right to me. Okay, 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 airplanes and all. The data goes back to 1934 and it has compounded. There's so many digits here. One, two, three, four, 21 million percent. Am I getting that right?

3:01Yeah. 21 million percent. That is an annual compound return of just under 15 percent. That's pretty incredible. 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 % year, you're not doing backflips with delight. I mean, that's a good year. But NVIDIA lately is putting up hundreds of percent a year. The lesson here is putting up 15 % a year again and again and again and again. It's the stock market equivalent of the turtle, right? You compound that 15 % over a very long period, the numbers just start looking astronomical over a period, like 21 million percent over, frankly, less than a century.

3:52Yeah, over less than a century by doing 15 % 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? I write a lot about like hedge fund managers that have, you know, made a bajillion percent 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 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 a 10 or 20 years.

4:34It'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 going to talk about is continuing to exist is very powerful. Don't go to zero is my top stock market tip, basically. And there's an analog to that is if you're a money manager, live a long time. Okay, number four at 22 million percent cumulative and just over 13 percent a year, General Dynamics. This really pleases me because General Dynamics was actually one of my stock picks in the stock picking contest this year. I picked it because I thought it was reasonably cheap stock, grows reasonably well, and the world is horrible this year.

5:25So I figured it'd be a good year to own an American defense stock. Probably would have been even better to own it 100 years ago. 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. Yeah. 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. Weapons as well. There's lots of weapons. Yeah, exactly. And speaking of big machines, you want to give us the number three? Yeah, that's another big machine company, although slightly less militaristic maybe.

6:08And this is a really weird one, but Kansas City Southern, a railway company that doesn't actually exist anymore. It was acquired a couple of years ago, but that made 36 million percent cumulative return over the past century or so. 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 going to work out pretty well for you.

6:53Right. 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. 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 T. And it's time to do the T and you survive. And, you know, a lot of these were the railways that went on to become successful are where those that appeared in the ashes of previous bankruptcies, which in a lot of capital intensive businesses, that's true.

7:39Okay, before we get to the top two, there's a couple of questions I want to 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 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.

8:27And I'm quite shocked that so far we're talking capital intensive businesses right down the list. Yeah. Well, I mean, we do have IBM sixth on the list. Yes. With frankly a pathetic 17 million percent return. Yeah. I mean, that is a bit embarrassing. But yeah, it does look really old world, capital intensive, not very techie or sexy. Part of that, of course, is just that point about staying around. Like anybody who's going to 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 percent return from the beginning.

9:16And 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. Yeah. And the trick is a bit like with life is just not to die. Yeah. Yeah. I mean, so the database that Besson Binder use 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.

10:08But the average life span of those companies is less than seven years. Yes. So that's really low. 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 yeah am i getting that right yeah no so i mean this starts getting a bit mathematical but like the mean outcome for a century of stock market data basically what the stock market generated is 22 000 so frankly if you put money in an index fund in 1925 you would have made that like a bandit yes but the median outcome like what the average stock has done although the median stock has done.

11:05It's actually a loss of 7.5%. Most stocks have actually lost money. And something like 90 % of them actually done worse than if you put money in a bank account. Negative 7.5 % 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%, sort of six and three quarters to seven and a quarter percent. So the average stock falls by 7%, but the stock index rises by 7%, which tells you there's like this small group of workhorses that is just dragging all the other crap stocks along.

11:53No, I mean, the old saying is stocks for the long run, but it's not stock for long run. Stock market does well. Individual stocks suck, right? Over half of all stocks have ever existed in the United States have lost money. That's incredible. 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 Company, 39 million percent if grandma had bought it in 1925 and held it until the end of 2023.

12:42Vulcan, according to Wikipedia here, is the largest producer of construction materials, primarily gravel, crushed stone, and sand, now employs 12 ,000 people at over 400 facilities. Mexico, Canada, the US, et cetera. I mean, obviously, the last few years haven't been the heyday of this business. But for cripe's sake, Robin, crushed stone. What is a more commoditized business than that? It is pretty wild, right? The second best best performing stock in the US stock market's history. It's not like something that makes like AI super chips or cloud computing or whatever. It makes literally gravel.

13:25It makes rocks. It crushes rocks and sells it. One thing this tells me though, to get back on my favorite 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.

14:05Yeah. I mean, if Silicon Valley only knew about the gold dust hidden in gravel, maybe that would change. 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, grinded out kind of business. Yeah, that's a good point, actually. 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. 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 to take your advice one more time, don't die.

14:43Survive for 100 years just doing that. And you're going to do okay. Yeah. So now, I'm going to ask our listeners to think to themselves, what is, in fact, the best compounding stock over the last hundred 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 265 million percent, 16 % a year for almost 100 years, Altria Group. sorry what the hell is an altria yeah altria is what we used to call philip morris we're talking about the mark we are 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 265 million percent.

15:52What do you make of that? That a nicotine provider, essentially, is our number one stock of all time. It's why Pablo Escobar made so much money. If you sell something that's addictive, 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. You put that very well. And I wonder, unlike the others, I guess Boeing has a great brand. Marbo 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 going to do pretty well.

16:39I think that's part of the lesson. Yeah. Yeah. I mean, there are lots of other tobacco companies on this list as well, like Universal and USD. But Philip Morris, or the artist formerly known as Philip Morris, just smashes everything else out there. 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.

17:20Now, do I conclude from that, A, I'm going to 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. Yeah. I mean, that was basically Jack Bogle's verbal quote that, you know, start looking for golden needles, just buy the entire haystack and relax. Yes. And I do think what's so fun about Bessonbinder's papers are that they are this like Rorschach's test for the finance industry.

18:11Because 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 I love passive investing. But that's what I see this is a strong contributing evidence to. But show the evidence to a stock picker. Oh, God, yes. They will say that, frankly, you can basically, if you buy 100 stocks, 99 % of them. Yeah. Like 99 of those 100 stocks can suck. You can lose all your money on them. But if you manage to get one of these mega, super compounding, super stocks, then your career is made.

18:54All right, listeners. Unhedged is going to take a cigarette break right now, and we'll be right back for Long and Short.

19:09Listeners, 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? I am extremely short something. Conviction short. I love it. Hit us. Yeah. Yeah. So I write a lot about ETFs. 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 where the founder, Michael Saylor, loves Bitcoin so much that he borrowed more money and basically used all the company's money to buy tons of Bitcoin.

19:57So it's a leveraged ETF on a leveraged company. And it is, I think, the moment the ETF industry has 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. I've got four words for you in response to that, Robin. Have fun staying poor. i i can guarantee you anybody trading this or holding this for a long time is going to get poor the these products these leverage single name etfs are the the most prodigious capital incinerators the finance industry has ever invented they literally make they make like cdo squared seem like good investments well i was calculating you would have made you would have lost less money investing with Bernie Madoff than investing some of these ETFs.

20:52And we still produce them. 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.

21:45And that is the key to success. With that in mind, listeners, we will fail spectacularly again in your feed next week.

22:08Head of Audio. Special thanks to Laura Clark, Alistair Mackey, Greta 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 slash unhedged offer. I'm Rob Armstrong. Thanks for listening.

22:38We'll be right back.