Consilient Observer

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Juli 25, 2023

Birth, Death, and Wealth Creation

Juli 25, 2023

Birth, Death, and Wealth Creation

Consilient Observer

Birth, Death, and Wealth Creation

Juli 25, 2023

Why Investors Need to Understand Corporate Demographics

Investors seeking to generate excess returns can benefit from understanding the demographics of public companies and their patterns of wealth creation.
We focus on the last half century of results in the U.S. and review the “births” and “deaths” of public companies and discuss how they have changed the composition of the market over that time.
Professor Hendrik Bessembinder, studying results from 1926-2022, documented that nearly 60 percent of the stocks of U.S. public companies failed to earn returns in excess of Treasury bills and that only 2 percent created more than 90 percent of the aggregate wealth.
The skewness in wealth creation suggests two approaches for investors: seek broad diversification or build a portfolio that tries to avoid the wealth destroyers while owning the wealth creators.

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DEFINITIONS

Net Operating Profit After Tax (NOPAT) represents the hypothetical operating income of a company if its capital structure was all-equity. The NOPAT margin is the ratio between a company's net operating profit after tax (NOPAT) and revenue.

Total Shareholder Return (TSR) is the total amount of money that a shareholder would make from each individual stock.

Return On Invested Capital (ROIC) represents the rate of return a company makes on the cash it invests in its business.

IMPORTANT INFORMATION

The views and opinions are those of the author as of the date of publication and are subject to change at any time due to market or economic conditions and may not necessarily come to pass. The views expressed do not reflect the opinions of all investment personnel at Morgan Stanley Investment Management (MSIM) and its subsidiaries and affiliates (collectively the "Firm"), and may not be reflected in all the strategies and products that the Firm offers.

This material is for the benefit of persons whom the Firm reasonably believes it is permitted to communicate to and should not be forwarded to any other person without the consent of the Firm. It is not addressed to any other person and may not be used by them for any purpose whatsoever. It is the responsibility of every person reading this material to fully observe the laws of any relevant country, including obtaining any governmental or other consent which may be required or observing any other formality which needs to be observed in that country.

This material is a general communication, which is not impartial, is for informational and educational purposes only, not a recommendation to purchase or sell specific securities, or to adopt any particular investment strategy. Information does not address financial objectives, situation or specific needs of individual investors.

Any charts and graphs provided are for illustrative purposes only. Any performance quoted represents past performance. Past performance does not guarantee future results. All investments involve risks, including the possible loss of principal.

Prior to making any investment decision, investors should carefully review the strategy’s relevant offering document. For the complete content and important disclosures, refer to the article pdf.

Birth, Death, and Wealth Creation