Market Update 2nd November 2026
Imaginary Friends
Another week another paper questioning my entire existence. This time Vanguard – noted galactic scale provider of index trackers – has a paper out saying index tracking is the way forward and it’s almost impossible for active managers to outperform.
The index they choose to back test is the Russell 3000 which accounts for 98% or so of listed US equities. The time period is January 1st 1990 to the 31st December 2025. The index is up nearly 4,000% in that time in US dollars and so would indeed have been a good idea to buy a tracker in 1990 if that’s what you did. Perhaps you sat watching the Berlin Wall fall in November 1989 or felt Margaret Thatcher’s 13 years as Prime Minister was near its end and foresaw several decades of US hegemony as the place to be.
I’m just going to add at this point that you couldn’t have done any of this with Vanguard as no Russell 3000 Vanguard tracker existed in 1990. Then it turns out you couldn’t have done it with anyone. ChatGPT reckons the first Russell 3000 tracker was launched by another extremely well-known index tracking provider on May 22nd 2000. Not too much foresight from the providers – in case you haven’t already noticed – this is laughably close to the dotcom peak – and trust me you are not getting 4,000% from there. If you waited twenty years for Vanguard to hit on the idea of launching a Russell 3000 tracker (September 2010) the cumulative return is just 650%.
The argument laid out in the paper is there have been around 12,500 stocks in the Russell 3000 since 1990. Of these, around 7,500 have fallen between 0-100%. The rest have risen to some extent, but most have risen relatively little with just under 2,000 rising between 0-50% (the lowest positive band they use with easily the biggest number of stocks). The numbers decrease very quickly and form a long tail until you get to the final band which is “greater than 3,000%” which is around 500 or so in a much bigger band. In other words, your strongly positive gains are concentrated in relatively few stocks while negative performers are well over 50%. The return skew is laid bare by a median return of -6.6% vs an average of +575%.
What they are saying is that while it is of course helpful to avoid the 7,500 or so negative return stocks, the real imperative is to own the 500 or so “greater than 3,000%” returns – or as many of them as possible – if you want to meet or exceed the benchmark.
They name the top 10 contributors overall which add up to nearly a third of the total return. The highest contributor at over 6% of the total is Alphabet. Second with over 5% is Microsoft. 8 out of 10 have been in the index all 36 years – Alphabet (21 years) and Nvidia (26 years) are the exceptions. Non-tech names such as Wal-Mart and Exxon Mobil also appear but the prevalence of tech names is a clue about when most of these gains were made.
Using Microsoft as the highest contributor that has been in the index through the whole period, its cumulative total return is 131,000%, but around half of that has come in the last few years. From the late 1990s just before the dotcom bubble, it went largely sideways for about two decades before regaining its highs just before Covid. Yes, if you bought and held patiently for 36 years it has paid off but it was largely dead money for over half that time.
When you look at it in this way it can all seem quite daunting and futile, but that is why no one does this. Did even Bill Gates know Microsoft would go up 131,000% in 1990? Probably not, but some of the framing is disingenuous to say the least.
If you look at the 7,500 out of 12,500 stocks that fell in the period, maybe add the 2,000 fairly inconsequential risers which together comes to 75% then this already looks like poor odds for choosing winners. The 500 stocks returning over 3,000% that you are really looking for are just 4%. Where do we start?
One place might be roughly a third of the index with negative earnings. It’s far from impossible for these stocks to go up, but probably not 3,000% most of the time. If we assume the negative earnings proportion is constant over the period that removes 4,125 stocks. Let’s also assume they are all in the bottom 75% – again not definitely – but let’s assume. That would leave 5,375 stocks in the “extremely unhelpful” cohort vs the remaining 3,000 better ideas of which 500 are in the 3,000% promised land.
What about size? Of the top 10 contributors the two smallest in 1990 were Microsoft and Apple – both then around $5bn or so in size. This is perhaps unsurprising since they are the two biggest contributors of the stocks that have been in the index through the whole period.
It’s extremely rare for a very small company to become a very big one. $5bn is not that small – it would easily get you into the top 100 in the UK while in the US it is not far off the Russell 1000 and Russell 2000 cut off in today’s money, so you wouldn’t be disadvantaging yourself in the hunt for 3,000 percenters by setting this as a lower limit. We could adjust $5bn in 1990 for inflation but happy to keep it simple.
Let’s assume the 12,500/3,000 turnover number applies equally to the top 1,000. This would give you 4,166 stocks in 36 years. Anyone can do this. We haven’t applied anything I would call skill or insight but have already improved our chances significantly. Now you can start adding whatever philosophy or process you choose.
We’re aware that active management isn’t perfect and no one gets everything right. We use some passive funds in portfolios where appropriate and Vanguard are of course free to promote themselves however they choose. But the intellectual dishonesty needed to justify a reliance on passive investing to the exclusion of everything else is quite something. Successful active management is hard to do and hard to find, but this doesn’t make it a fool’s errand to try.
According to Trustnet, Microsoft is the most held stock in the IA US equity sector with 61.5% of funds naming it in their top 10 holdings. If it is a proverbial needle in a haystack, a 1 in 12,500 lottery ball chance, and the only way to make sure you don’t miss out is to buy absolutely everything all the time, then how did they all end up with the winning ball? It’s true that they won’t have all held it since 1990, but neither has the Vanguard Russell 3000 tracker.
Robert Fullerton – Senior Research Analyst
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