So Few Market Winners, So Much Dead Weight

The inclusive approach is the opposite: buy just about every stock, thereby ensuring that you will own the big winners, as well as lots of mediocre performers and plenty of outright losers. This keeps your costs low, and time works in your favor. Eventually, winners push aside the losers, as they accumulate market capitalization-weighted size.

Each approach has its advantages and disadvantages. Their merits have been driving the debate over active versus passive investing, and alpha versus beta. Other approaches to inclusive-exclusive screening include factor investing and smart beta.

There are challenges.

The exclusive approach requires that a number of low-probability events break your way as an investor. First, you must develop a methodology that allows you to identify those rare companies that will generate outsized returns over time. At the same time, you must be able to avoid the various value traps and other false starts. These pitfalls historically have worked wonders at separating investors from their money.

Next, there is an implied question built into the first: Once you actually find these rare companies, you have to hold on to them. This too is much more challenging than most realize. The stellar stocks tend to have regular, gut-wrenching price slumps; the big winners above have all suffered retreats of 50, 60 even 90 percent on the way to becoming the biggest winners. Most investors lack the fortitude and discipline to manage the pain of these severe price fluctuations.

Once you get through those two challenges, you have to decide when to jettison these winners since nothing continues forever. As Sommer points out, General Motors Co. was a star from 1926 on — that is, until it went bankrupt in June 2009 and basically wiped out equity investors. AT&T Inc., meanwhile, was broken into many smaller parts, some of which have done very well (Verizon Communications Inc.), while others not so much (Lucent).

As we have observed repeatedly, finding the very best companies to own is very difficult to do.

The inclusive approach has its challenges as well. Indexing is boring, and it gives you nothing to talk about at parties. It is considered a lazy way of investing, even un-American and antithetical to capitalism — or worse.

But it does have two undeniable advantages for those hunting for the market's biggest winners: First, it's much less expensive, and second, it is guaranteed to work.

Think about that the next time you wistfully look at Amazon's stock price.