The Hidden Cost of Concentrated Wealth

Bloomberg published a news item last week stating that Cisco shares were up strongly on news of its forecast for strong sales ahead. What caught my attention was Bloomberg’s observation that Cisco was close to reaching a new all-time high, finally recovering from its prior peak set more than 25 years ago.

This reminded me of a study published by Morgan Stanley earlier this year. The research piece, titled “Drawdowns and Recoveries,” analyzed the performance of individual stocks over the long term. Its observations were eye-opening and offered a cautionary tale for those with large, concentrated stock holdings.

The analysis of more than 6,500 U.S. stocks from 1985 to 2024 reveals that the median drawdown (loss from peak price) was 85%, while the average was slightly smaller at 81%. More than half of companies experiencing a drawdown of 80% or more never return to their prior high.

Deeper declines are associated with lower probabilities of recovery, though the stocks that do recover show higher potential rebounds: stocks that fell 95% or more had median subsequent annualized returns exceeding 30% over the following ten years. However, compounding math means that even large percentage rebounds rarely reach the original peak. A stock down 95% must rise 20x to recover to its prior high; however, one up 30% annually for 10 years ends only 13.8x higher, well short of breakeven.

Beyond the drawdowns, the study also highlights extreme skewness: just 2% of companies created 90% of the $79 trillion in net U.S. equity wealth since 1926. The top six (Apple, Microsoft, NVIDIA, Alphabet, Amazon, and ExxonMobil) alone account for $17 trillion. But even the greatest winners, such as Amazon and NVIDIA, endured drawdowns exceeding 80%–90%.

Research by Wes Gray at Alpha Architect puts that volatility in an interesting context. In his research, he analyzed a portfolio of the 50 best-performing stocks in the S&P 500, reconstituted with hindsight every five years, meaning he selected the top 50 as if one had known them in advance. In this theoretical back-test from 1927-2016, the performance was approximately triple the S&P 500 index return. However, the volatility was severe, including a drawdown of 76%. His conclusion: even with this perfect hindsight, one would likely get fired as an active manager.

Diversification can help mitigate these extremes: the S&P 500’s maximum drawdown was 58%, far less than the 80-85% median drawdown of individual stocks. For qualified investors, branching out further to private equity, private real estate, and other growth assets may help reduce drawdown risk even more.

We sometimes say we are in the “stay rich” business. Our clients come to us having already created wealth, often through concentrated risk in a single company that experienced dramatic growth. One of the most important ways to help preserve that wealth is to consider shifting from concentrated risks to a diversified basket of growth assets.

Jeff Buck