Birth, Death, and Wealth Creation

July 25, 2023

Birth, Death, and Wealth Creation

Consilient Observer

Birth, Death, and Wealth Creation

July 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.

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