Investment In Common Stocks

.title[
# Investment In Common Stocks
]
.subtitle[
## Microeconomics for Students of Accounting, Finance, and Digital Applications
]
.author[
### Lyuben Ivanov, PhD
]
.institute[
### Sofia University St. Kliment Ohridski
]
.date[
### Fall Term 2024/2025
]

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<strong>  Introduction</strong>
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# Introduction

This course is designed to

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    <td style="text-align: left; vertical-align: top; width: auto;">introduce YOU to the basic concepts and models of microeconomics</td>
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YOU have already learned a lot about

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    <td style="text-align: left; vertical-align: top; width: auto;">the pricing of goods and services that YOU buy</td>
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    <td style="text-align: left; vertical-align: top; width: auto;">the valuation of the labor YOU (will eventually) provide</td>
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Now YOU are going to learn how investment in common stocks can potentially increase the growth rate of YOUR savings.

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<strong>  (Financial!) Investment In <br>&nbsp;Common Stocks</strong>
]
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# Benjamin Graham (1894-1976)

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# Benjamin Graham (1894-1976)

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    <td style="text-align: left; vertical-align: top; width: auto;">Graduated from Columbia University at the age of 20, as a salutatorian of the class of 1914</td>
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    <td style="text-align: left; vertical-align: top; width: auto;">Weeks before graduation, was offered teaching positions in three different faculties of Columbia University: Greek and Latin philosophy, English, and mathematics</td>
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    <td style="text-align: left; vertical-align: top; width: auto;">His investment partnership earned an annualized return of about 20% from 1936 to 1956 (compared to 12% for the market overall)</td>
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    <td style="text-align: left; vertical-align: top; width: auto;">Joined Columbia Business School's faculty at 1928 and became known as the father of modern security analysis</td>
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# Benjamin Graham (1894-1976)

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    <td style="text-align: left; vertical-align: top; width: auto;">His most famous student at CBS was Warren Buffett</td>
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    <td style="text-align: left; vertical-align: top; width: auto;">In 1934, wrote Security Analysis, the first book ever to put the study of investments on a systematically logical footing</td>
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    <td style="text-align: left; vertical-align: top; width: auto;">In 1949, published The Intelligent Investor, which Warren Buffett has called 'by far the best book about investing ever written.'</td>
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    <td style="text-align: right; vertical-align: top; width: 50px;"><i class="fa fa-money"></td>
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    <td style="text-align: left; vertical-align: top; width: auto;">Wrote extensively about monetary policy, earning praise from John Maynard Keynes</td>
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# Benjamin Graham (1894-1976)

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    <td style="text-align: left; vertical-align: top; width: auto;">Held several U.S. patents, including one on an improved slide rule that anticipated many elements of the pocket calculator</td>
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    <td style="text-align: left; vertical-align: top; width: auto;">Wrote an original Broadway play, True to the Marines, that may have inspired the classic movie Born Yesterday</td>
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    <td style="text-align: left; vertical-align: top; width: auto;">Translated a Uruguayan novel, Mario Benedetti's The Truce, into English; one of his favorite hobbies was translating Homer into Latin and Virgil into Greek</td>
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    <td style="text-align: left; vertical-align: top; width: auto;"><em>An intellect whose breadth almost exceeded definition. Certainly I have never met anyone with a mind of similar scope.</em><br><span style="display: block; text-align: right;">Warren Buffett </span></td>
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# Warren Buffett (1930&mdash;present)

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    <td style="text-align: left; vertical-align: top; width: auto;">At age 7 borrowed the book One Thousand Ways to Make $1,000 from the Omaha public library (and read it!)</td>
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    <td style="text-align: left; vertical-align: top; width: auto;">His father was a stock broker who introduced him to trading stocks at a very early age &mdash; at 11 years of age Warren bought his first stock</td>
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    <td style="text-align: left; vertical-align: top; width: auto;">At the Wharton School of Finance and Commerce he was mostly spending time at a nearby brokerage office, complained  that he understands business better than the professors and was passing his exams with excellent grades</td>
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    <td style="text-align: left; vertical-align: top; width: auto;">After two years in Wharton he transferred to the University of Nebraska where he graduated with a BA degree in Business Administration within just an year</td>
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# Warren Buffett (1930&mdash;present)

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    <td style="text-align: left; vertical-align: top; width: auto;">At age 19 read the book The Intelligent Investor and was so impressed that he decided to study in CBS, graduating with an MS in Economics while only 21 years old</td>
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    <td style="text-align: left; vertical-align: top; width: auto;">From 1954 to 1956 worked at the Graham-Newman partnership as a securities analyst</td>
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    <td style="text-align: left; vertical-align: top; width: auto;">In 1965 his investment partnerships amassed a majority stake in Berkshire Hathaway, a struggling textile manufacturer, allowing him to take control over the company, replace the president and pivot the business away from textiles</td>
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# <span style="position: relative; top: -75px"> Value Of $100 Invested In Berkshire Hathaway On Jun 27, 1983 </span>

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# <span style="position: relative; top: -75px"> Value Of $100 Invested In Berkshire Hathaway On Nov 27, 2019 </span>

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# <span style="position: relative; top: -75px"> Value Of $100 Invested In Apple <br>On Nov 27, 2019 </span>

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# <span style="position: relative; top: -75px"> Value Of $100 Invested In NVDIA <br>On Nov 27, 2019 </span>

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# <span style="position: relative; top: -75px"> Value Of $100 Invested In Innodata <br>On Nov 27, 2019 </span>

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<strong>  What Is Going On Here?</strong>
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<strong>  Simple Model Of Investment In <br>&nbsp;Common Stocks</strong>
]
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# Book Value of Equity

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    <td style="text-align: center; vertical-align: top; width: 150px;"><b>book value of equity</b></td>
    <td> </td>
    <td> </td>
    <td style="vertical-align: top;">the accounting (book) value of assets of a business minus the accounting (book) value of the liabilities</td>
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    <td> as of Sep 30, 2024 Berkshire Hathaway had assets of $1,147 bln financed by liabilities of $515 bln, implying a book value of stockholders' equity of $632 bln </td>
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    <td> the book value of stockholder's equity is an accounting concept and, therefore, backward looking </td>
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# Book Value Per Share

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    <td style="text-align: center; vertical-align: top; width: 150px;"><b>book value per share</b></td>
    <td> </td>
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    <td style="vertical-align: top;">the book value of stockholders' equity divided by the number of shares outstanding</td>
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    <td> as of Sep 30, 2024 Berkshire Hathaway had a book value of stockholders' equity of $632 bln and average equivalent Class B shares outstanding of 2.2 bln, implying a book value of $287 per class B share </td>
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    <td> profits increase the book value per share if they are either retained or used for stock repurchases (decreasing the number of shares outstanding) </td>
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# Table Completion Task

<div style="position: relative; top: 90px;">

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    <th>Company</th>
    <th>Book Value of Equity</th>
    <th>Number of Shares Outstanding</th>
    <th>Book Value Per Share</th>
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    <td>Berkshire Hathaway</td>
    <td style="text-align: right">$632 bln</td>
    <td style="text-align: right">2.2 bln</td>
    <td style="text-align: right">$293</td>
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    <td>Apple</td>
    <td style="text-align: right">$57 bln</td>
    <td style="text-align: right">15.4 bln</td>
    <td style="text-align: right" class="can-edit"> </td>
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    <td >NVDIA</td>
    <td style="text-align: right">$66 bln</td>
    <td style="text-align: right">24.8 bln</td>
    <td style="text-align: right" class="can-edit"></td>
  </tr>
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    <td>Innodata</td>
    <td style="text-align: right">$48 mln</td>
    <td style="text-align: right">34.0 mln</td>
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  </tr>
</table>

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# Price to Book Ratio

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    <td style="vertical-align: top;">the ratio between the market price of a share and the accounting value of the equity per share</td>
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    <td> recently the market price of Berkshire Hathaway's Class B shares was $480 per share while the stockholders' equity per Class B share was valued at about $293, implying a P/B ratio of 1.64 </td>
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    <td> the P/B ratio may increase if either the book value per share decreases or the market price per share increases </td>
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# Table Completion Task

<div style="position: relative; top: 90px;">

<table class="none">
  <tr>
    <th>Company</th>
    <th>Book Value Per Share</th>
    <th>Market Price Per Share</th>
    <th>Price to Book Ratio</th>
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    <td>Berkshire</td>
    <td style="text-align: right">$293</td>
    <td style="text-align: right">$480</td>
    <td style="text-align: right">1.64</td>
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    <td>Apple</td>
    <td style="text-align: right">$3.7</td>
    <td style="text-align: right">$230</td>
    <td style="text-align: right" class="can-edit"> </td>
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    <td >NVDIA</td>
    <td style="text-align: right">$2.7</td>
    <td style="text-align: right">$140</td>
    <td style="text-align: right" class="can-edit"></td>
  </tr>
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    <td>Innodata</td>
    <td style="text-align: right">$1.4</td>
    <td style="text-align: right">$45</td>
    <td style="text-align: right" class="can-edit"></td>
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</table>

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# Market Mispricing

In the general case, if financial capital W is invested in common stock with price-to-book ratio P/B at moment *t*, the owner of the stock gets equity ownership according to the  following formula:

$$ \sf BV_t  =  \frac{W_t}{({P/B})_t} $$

For example, if $10,000 are invested in a company with price-to-book ratio of 0.5 (due to Mr Market being pessimistic about the future of the company and/or stocks in general), the buyer would get equity ownership calculated as follows:

$$ \sf BV_t  =  \frac{10,000}{0.5} = 20,000 $$
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# Quick Test

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    <p>What is the book value of the equity that will be purchased if $50,000 are invested in a company with a price-to-book ratio of 5?</p>
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# Reversal of Market Sentiment

In the general case, if the owner of a common stock that sells with price-to-book ratio P/B at moment *t+1*, the owner of the stock can dispose of it by selling at market price <span><i>P<sub>t+1</sub></i></span> and get financial capital as follows:

$$ \sf W\_{t+1} =  BV\_{t+1} \times ({P/B})\_{t+1}  $$
For example, if in moment *t+1* Mr Market becomes more optimistic about the future prospects of the company and/or stocks in general, resulting in the P/B ratio increasing from 0.5 to 0.6, the stock owner can liquidate his position and get financial capital as follows:

$$ \sf W\_{t+1} =  20,000 \times 0.6 = 12,000 $$
**NB:** This example assumes lack of positive or negative changes to the book value of the company's equity due to profits or losses for the period!

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# Quick Test

<div>
    <p>What is the financial capital that will be received if the owner of a common stock with a book value of $30,000 sells it at a price-to-book ratio of 1.2?</p>
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    <input type="text" id="userAnswer2" placeholder="Answer" class="input-field"><button onclick="checkAnswerO(36000, 'result2', 'userAnswer2')" class="submit-button">Check</button>
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# Quick Test

<div>
    <p>What will be the profit if Warren invests $10,000 to buy equity stake at price-to-book ratio of 0.5 and sells it soon afterwards at price-to-book ratio of 2?</p>
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    <input type="text" id="userAnswer3" placeholder="Answer" class="input-field"><button onclick="checkAnswerO(30000, 'result3', 'userAnswer3')" class="submit-button">Check</button>
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# Profitability Overcomes Pessimism

Even, if in moment *t+1* Mr Market remains pessimistic about the future prospects of the company and/or stocks in general, resulting in the P/B ratio remaining 0.5, the investment operation would still be successful if the underlying business was profitable in the period between *t* and *t+1* &mdash; it would either pay dividend to the stock owner or retain the earnings, increasing the book value of equity. In the latter case, the owner can liquidate her position and get financial capital as follows:

$$ \sf W\_{t+1} =  BV\_{t+1} \times ({P/B})\_{t+1} = (BV\_{t} + \pi\_{t, t+1})\times ({P/B})\_{t} $$

For example, if the book value of the company's equity increases from $20,000 to $22,000 due to retained profits for the period, the investor's wealth will increase with $1,000:

$$
\sf W\_{t+1} = (20,000 + 2,000)\times 0.5 = 11,000
$$

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# Quick Test

<div>
    <p>What will be the financial capital that will be received by Warren for his equity with book value of $20,000 that can be sold at a price-to-book ratio of 0.5 if the retained profit for the holding period is $5,000?</p>
</div>

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    <input type="text" id="userAnswer4" placeholder="Answer" class="input-field"><button onclick="checkAnswerO(12500, 'result4', 'userAnswer4')" class="submit-button">Check</button>
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# Optimism Prevails Despite Losses

Even, if the business loses money in the period between *t* and *t+1*, the investment operation can still be successful if Mr Market becomes optimistic about the future prospects of the company and/or stocks in general, resulting in a price-to-book ratio increasing to 0.75. In the latter case, the owner can liquidate his position and get financial capital as follows:

$$ \sf W\_{t+1} =  BV\_{t+1} \times ({P/B})\_{t+1} = (BV\_{t} + \pi\_{t, t+1})\times ({P/B})\_{t+1} $$
For example, if the book value of the company's equity decreases from $20,000 to $18,000 due to losses for the period, the investor's wealth will increase by $3,500:

$$
\sf W\_{t+1} = (20,000 - 2,000)\times 0.75 = 13,500
$$
---

# Quick Test

<div>
    <p>What will be the financial capital that will be received by Warren for his equity with book value of $20,000 that can be sold at a price-to-book ratio of 0.8 if the loss for the holding period is $4,000?</p>
</div>

<div style="position: relative; top: 330px">
    <input type="text" id="userAnswer5" placeholder="Answer" class="input-field"><button onclick="checkAnswerO(12800, 'result5', 'userAnswer5')" class="submit-button">Check</button>
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# Justified Optimism

In the best case scenario, the underlying fortune of the business will reverse and the company will become profitable in the period between *t* and *t+1*, increasing the book value of equity from $20,000 to $22,000. In addition, Mr Market will become more optimistic about the future prospects of the company and/or stocks in general, resulting in a price-to-book ratio increasing to 0.75. In the latter case, the owner can liquidate his position and get financial capital as follows:

$$ \sf W\_{t+1} =  BV\_{t+1} \times ({P/B})\_{t+1} = (BV\_{t} + \pi\_{t, t+1})\times ({P/B})\_{t+1} $$

For example, if the book value of the company's equity increases from $20,000 to $22,000 due to retained profits for the period, the investor's wealth will increase by $6,500:

$$ \sf W\_{t+1} = (20,000 + 2,000) \times 0.75 = 16,500 $$
---

# Quick Test

<div>
    <p>What will be the profit that will be received by Warren on his $10,000 investment at P/B ratio of 0.5 if the retained profit for the holding period is $5,000 while the P/B ratio increases to 1?</p>
</div>

<div style="position: relative; top: 330px">
    <input type="text" id="userAnswer6" placeholder="Answer" class="input-field"><button onclick="checkAnswerO(15000, 'result6', 'userAnswer6')" class="submit-button">Check</button>
</div>
<div id="result6"></div>

---

# Worst Case Scenario: Double Whammy

In the worst case scenario, the underlying fortune of the business will reverse and the company will lose money in the period between *t* and *t+1*, decreasing the book value of equity from $20,000 to $18,000. In addition, Mr Market will, rightly, become more pessimistic about the future prospects of the company and/or stocks in general, resulting in the price-to-book ratio decreasing to 0.4. In the latter case, the owner can liquidate his position and get financial capital as follows:

$$
\sf W\_{t+1} = (20,000 - 2,000)\times 0.4 = 7,200
$$
---

# Quick Test

<div>
    <p>What will be the profit that will be received by Warren on his $10,000 investment at P/B ratio of 0.5 if the loss for the holding period is $5,000 while the P/B ratio decreases to 0.25?</p>
</div>

<div style="position: relative; top: 330px">
    <input type="text" id="userAnswer7" placeholder="Answer" class="input-field"><button onclick="checkAnswerO(-6250, 'result7', 'userAnswer7')" class="submit-button">Check</button>
</div>
<div id="result7"></div>

---

# Table Completion Task

<table class="none">
<tr>
<th style="vertical-align: top;">Company</th>
<th>BV<sub>19</sub></th>
<th>P<sub>19</sub></th>
<th>P/BV<sub>19</sub></th>
<th>BV<sub>24</sub></th>
<th>P<sub>24</sub></th>
<th>P/BV<sub>24</sub></th>
<th>%&Delta;BV</th>
<th>%&Delta;P</th>
</tr>
<tr>
    <td style="text-align: right; height: 0.3em;"></td>
    <td style="text-align: right; height: 0.3em;"></td>
    <td style="text-align: right; height: 0.3em;"></td>
    <td style="text-align: right; height: 0.3em;"></td>
    <td style="text-align: right; height: 0.3em;"></td>
    <td style="text-align: right; height: 0.3em;"></td>
    <td style="text-align: right; height: 0.3em;"></td>
    <td style="text-align: right; height: 0.3em;"></td>
  </tr>
  <tr>
    <td>Berkshire</td>
    <td style="text-align: right">402B</td>
    <td style="text-align: right">539B</td>
    <td style="text-align: right" class="can-edit"></td>
    <td style="text-align: right">632B</td>
    <td style="text-align: right">1,030B</td>
    <td style="text-align: right" class="can-edit"></td>
    <td style="text-align: right" class="can-edit"></td>
    <td style="text-align: right" class="can-edit"></td>
  </tr>
  <tr>
    <td>Apple</td>
    <td style="text-align: right">91B</td>
    <td style="text-align: right">1,180B</td>
    <td style="text-align: right" class="can-edit"></td>
    <td style="text-align: right">57B</td>
    <td style="text-align: right">3,520B</td>
    <td style="text-align: right" class="can-edit"></td>
    <td style="text-align: right" class="can-edit"></td>
    <td style="text-align: right" class="can-edit"></td>
  </tr>
  <tr>
    <td>NVIDIA</td>
    <td style="text-align: right">11B</td>
    <td style="text-align: right">132B</td>
    <td style="text-align: right" class="can-edit"></td>
    <td style="text-align: right">66B</td>
    <td style="text-align: right">3,331B</td>
    <td style="text-align: right" class="can-edit"></td>
    <td style="text-align: right" class="can-edit"></td>
    <td style="text-align: right" class="can-edit"></td>
  </tr>
  <tr>
    <td>Innodata</td>
    <td style="text-align: right">0.03B</td>
    <td style="text-align: right">0.03B</td>
    <td style="text-align: right" class="can-edit"></td>
    <td style="text-align: right">0.05B</td>
    <td style="text-align: right">1.32B</td>
    <td style="text-align: right" class="can-edit"></td>
    <td style="text-align: right" class="can-edit"></td>
    <td style="text-align: right" class="can-edit"></td>
  </tr>
</table>

*Notes:* <br>
The book value (BV) of equity is measured is USD for the company as a whole and not per share. <br>The market price (P) of equity is measured in USD for the company as a whole (market capitalization).

---

# Conclusion

.pull-right-2[
_There are many ways to make money and lose money on Wall Street_
<hr style="background-color: black; margin: 0em 0em 0em 0em;">
<span style="float: right; font-variant: small-caps; "> Benjamin Graham </span>
]

---

class: clear, middle, no-scribble
  
  .font200[
<strong>  Model Of Long-Term Investment</strong>
]
<hr>

---

.pull-right-2[
_Over the long term, it’s hard for a stock to earn a much better return than the business which underlies it earns._
<hr style="background-color: black; margin: 0em 0em 0em 0em;">
<span style="float: right; font-variant: small-caps; "> Charlie Munger </span>
]

.pull-right-2[
_Charlie made me focus on the merits of a great business with tremendously growing earning power, but only when you can be sure of it&mdash;not like Texas Instruments or Polaroid, where the earning power was hypothetical._
<hr style="background-color: black; margin: 0em 0em 0em 0em;">
<span style="float: right; font-variant: small-caps; "> Warren Buffett </span>
]

---

# Modelling Growing, Profitable Business

In the general case, if some financial capital W is invested in common stock with price-to-book ratio P/B at moment *t* for *n* periods (e.g. years), and the underlying business reinvests all its earnings with average return on equity *ROE<sub>a</sub>* the market value of the financial capital would grow according to the following formula:

$$
\sf W\_{t+n}  =  \frac{W\_t}{({P/B})\_t}\times (1 + ROE\_a)^n \times (P/B)\_{t+n}
$$
---

# Quick Test

.panelset.sideways.right[
.panel[
.panel-name[Problem]

<div>
    <p>A company that had a book value of equity amounting to $19 per share in 1964 reinvested the earnings for 57 years at average rate of return on equity amounting to 18.71% per year. How much was its book value at the end of the holding period?</p>
</div>

<div style="position: relative; top: 240px">
    <input type="text" id="userAnswer8" placeholder="Answer" class="input-field"><button onclick="checkAnswerO(334603, 'result8', 'userAnswer8')" class="submit-button">Check</button>
</div>
<div id="result8"></div>
  
]
.panel[
.panel-name[Blackboard]
A company that had a book value of equity amounting to $19 per share in 1964 reinvested the earnings for 57 years at average rate of return on equity amounting to 18.71% per year. How much was its book value at the end of the holding period?
]
.panel[
.panel-name[Solution]
$$ \sf BV\_{t+57} =  BV\_t \times (1 + ROE\_a)^n $$
$$ \sf BV\_{t+57} =  19 \times (1+0.1871)^{57} $$

$$ \sf BV\_{t+57} = 334,603 $$
]
]

---

# Quick Test

.panelset.sideways.right[
.panel[
.panel-name[Problem]

<div>
    <p>Warren invested $100 in a company with a price-to-book ratio of 0.7 in 1964. The company reinvested all its earnings at an average rate of return on equity amounting to 18.71% per year. At the end of the period the price to book ratio was 1.4. How much was the market value of Warren's investment at the end of the holding period?</p>
</div>

<div style="position: relative; top: 150px">
    <input type="text" id="userAnswer9" placeholder="Answer" class="input-field"><button onclick="checkAnswerO(3522200, 'result9', 'userAnswer9')" class="submit-button">Check</button>
</div>
<div id="result9"></div>
  
]
.panel[
.panel-name[Blackboard]
Warren invested $100 in a company with a price-to-book ratio of 0.7 in 1964. The company reinvested all its earnings at an average rate of return on equity amounting to 18.71% per year. At the end of the period the price to book ratio was 1.4. How much was the market value of Warren's investment at the end of the holding period?
]
.panel[
.panel-name[Solution]
$$ \sf W\_{t+n} =  \frac{W\_t}{({P/B})\_t}\times (1 + ROE\_a)^n \times (P/B)\_{t+n} $$
$$ \sf W\_{t+n} = \frac{100}{0.7} \times (1+0.1871)^{57} \times 1.4 $$
$$ \sf W\_{t+n} = 100 \times 17,611 \times 2 $$

$$ \sf W\_{t+n} = 3,522,200 $$
]
]

---

.pull-right-2[
_Return on beginning equity capital... We believe the latter yardstick to be the most important measure of single-year managerial performance. Informed use of that yardstick, however, requires an understanding of many factors, including accounting policies, historical carrying values of assets, financial leverage, and
industry conditions._
<hr style="background-color: black; margin: 0em 0em 0em 0em;">
<span style="float: right; font-variant: small-caps; "> Warren Buffett </span>
]

---

# Understanding The Price-To-Book Ratio

<br>

$$ (P/B)\_t =  \frac{P\_t}{B\_t}$$
$$ (P/B)\_t =  \frac{P\_t}{B\_t} \times \frac{\pi\_{t+1,t}}{\pi\_{t+1,t}} $$
$$ (P/B)\_t =  \frac{P\_t}{\pi\_{t+1,t}} \times \frac{\pi\_{t+1,t}}{B\_t} $$
$$ (P/B)\_t = {P/E^e}_{t} \times ROE\_t^e $$
---

# DuPont Identity

<br>

$$ \sf \text{ROE} = \frac{\text{net income}}{\text{shareholder equity}} $$

$$ \text{ROE} = \frac{\text{net income}}{\text{sales revenue}}\times \frac{\text{sales revenue}}{\text{shareholder equity}} $$

$$ 	\text{ROE} = \frac{\text{net income}}{\text{sales revenue}}\times \frac{\text{sales revenue}}{\text{total assets}} \times \frac{\text{total assets}}{\text{shareholder equity}} $$

$$\text{ROE} = \text{profit margin} \times \text{total asset turnover} \times \text{financial leverage} $$

---

# Hendrik Bessembinder Research

Professor Bessembinder used the Center for Research in Security Prices (CRSP) daily common stock database to measure compound returns for all publicly-listed U.S. common stocks, and to identify the stocks that generated the highest compound rates of return, during the ninety-eight years spanning December 31, 1925 to December 31, 2023.

As of December 2023, CRSP reported returns for 29,078 distinct common stocks.
Although the study spans ninety-eight calendar years only 31 stocks are present in the data across all ninety-eight years. This is 0.11% of the total number of stocks in the database.

The median cumulative compound return across stocks is -7.41%, as 51.64% of
stocks realized negative compound returns over their full lives in the CRSP database.

---

# Hendrik Bessembinder Research

The mean outcome across stocks is a cumulative compound return of 22,840%, or equivalently, final wealth of $229.40 per dollar initially invested.

Therefore, a small number of stocks account for the majority of the wealth creation in the U.S. stock market. The best-performing 4% of listed companies account for the entire wealth creation of the U.S. stock market since 1926.

Are the best performers some super exciting high tech companies? No, the best performers are boring companies that have been around for a long time.

---

# Hendrik Bessembinder Research

<table class="none">
  <tr>
    <th style="vertical-align: top">Company Name (Most Recent)</th>
    <th style="vertical-align: top">Years</th>
    <th style="vertical-align: top">Cumulative Gross Wealth Per Dollar</th>
    <th style="vertical-align: top">Annualized Compound Return (%)</th>
  </tr>
  <tr>
    <td>ALTRIA GROUP INC</td>
    <td style="text-align: right">98.00</td>
    <td style="text-align: right">2,655,290</td>
    <td style="text-align: right">16.29%</td>
  </tr>
  <tr>
    <td>VULCAN MATERIALS CO</td>
    <td style="text-align: right">98.00</td>
    <td style="text-align: right">393,492</td>
    <td style="text-align: right">14.05%</td>
  </tr>
  <tr>
    <td>KANSAS CITY SOUTHERN</td>
    <td style="text-align: right">95.95</td>
    <td style="text-align: right">361,757</td>
    <td style="text-align: right">14.27%</td>
  </tr>
</table>

---

# Key Takeaways

By now YOU should have learned the importance of profitability and the growth prospects of the underlying business (measured by return on equity!) for the performance of investments in common stocks. However, what determines the profitability and the growth prospects of a business?

There are two major theoretical frameworks:

- the structure-conduct-performance framework;
- the resource-based view of the firm;

By the end of this course we will be studying business economics which mostly explains the structure-conduct-performance framework.

---

# Questions?

<br>

</body>
</html>

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# Thank You!

<br>