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Why rank stocks at all?

A small number of stocks drove most historical wealth creation. That does not make the next winners easy to identify.

Why rank stocks? In one U.S. study, the winners were rare.

Sources

These sources ask different questions about business value and stock returns. None is a recipe for finding tomorrow's winners.

1. Bessembinder (2017, 2020):

  • “Do Stocks Outperform Treasury Bills?”
  • In Bessembinder's historical U.S. sample, the best-performing 4.0% of companies accounted for all net wealth created above Treasury bills.
  • That is a result measured after the fact. It does not show that growth, founder status, or any other single trait could identify the winners in advance.
  • Original 2017 paper: “Do Stocks Outperform Treasury Bills?”

    • https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2900447

  • 2020 update (global data): “Wealth Creation in the U.S. Public Stock Markets 1926–2019”

    • https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3892609

    https://www.pm-research.com/content/iijinvest/30/3/47

  • Supplemental data (global wealth creation)

    • https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3892639

    2. McKinsey + Corporate Finance Institute research on value creation:

  • For a business, three questions are worth asking:
    • Revenue growth,
    • ROIC exceeding cost of capital,
    • Reinvestment runways.
  • They help explain business value. They do not guarantee a good stock return at any purchase price.
  • McKinsey's Valuation (7th Edition) discusses growth, ROIC, and reinvestment as drivers.

    • https://www.mckinsey.com/capabilities/strategy-and-corporate-finance/our-insights/valuation-measuring-and-managing-the-value-of-companies

  • McKinsey: “The Power of Revenue Growth”

    • https://www.mckinsey.com/capabilities/growth-marketing-and-sales/our-insights/the-power-of-growth

  • McKinsey: “Return on invested capital as a driver of value”

    • https://www.mckinsey.com/capabilities/strategy-and-corporate-finance/our-insights/roic-and-value-creation

  • Corporate Finance Institute (CFI): Reinvestment & ROIC Framework

    • https://corporatefinanceinstitute.com/resources/valuation/roic-return-on-invested-capital/

    The common idea is straightforward: growth matters more when new investment earns above its cost.

    3. What founder leadership might change

  • The cited work discusses a historical association between founder leadership and performance. The result depends on the sample and is not a return forecast.
  • Founder ownership can align incentives. Check the actual stake and governance rather than assuming the label is enough.
  • Sector differences matter. A finding about one group of companies may not carry over to another.
  • Harvard Business Review: “Why Do Founder-Led Companies Outperform?”

    • https://hbr.org/2016/12/why-do-founder-led-companies-outperform

  • Stanford GSB: Founder-CEO Effects on Firm Performance

    • https://www.gsb.stanford.edu/insights/founder-ceos-can-drive-growth

  • Harvard: “The Value of Founder Control”

    • https://www.hbs.edu/ris/Publication%20Files/15-060_1b1c40a1-f52e-4d7c-aace-02dc353f83c1.pdf

    4. Other research on quality and growth

    Case studies of large historical winners often discuss:

  • High organic growth
  • Large TAM
  • Moats (network effects, switching costs)
  • Founder-led

      These are observations about selected winners, not a test that predicts the next one.

  • AQR research examines intangibles and growth.

    • “Intangible Value” (Frazzini, Israel, Moskowitz)

    https://www.aqr.com/Insights/Research/Journal-Article/Intangible-Value

  • AQR's “Quality Minus Junk” (QMJ) paper examines quality as an investing factor.
    • Shows why profitability + margins + reinvestment matter.

    • https://www.aqr.com/Insights/Research/Journal-Article/Quality-Minus-Junk

  • Baillie Gifford has published case studies of 100-bagger stocks.
    • (Deep dives into Amazon, Netflix, Tesla, Nvidia, etc.)

    • https://www.bailliegifford.com/en/usa/professional-investor/insights/

    Use the long-term investing and growth research sections to find the relevant papers.

    https://www.bailliegifford.com/en/usa/professional-investor/insights/the-anatomy-of-a-growth-stock/

  • ARK's analysis examines big stock-market winners.

    • ARK discusses how adoption can expand a market. That is a thesis to test, not a growth rate to assume.

    https://research.ark-invest.com/

    https://research.ark-invest.com/big-ideas-2024

  • Sequoia Capital discusses moats, TAM, and optionality.
    • “Why Moats Matter”

    • https://www.sequoiacap.com/article/why-moats-matter/

    https://www.sequoiacap.com/article/the-end-of-moats/

    These sources discuss network effects, new markets, and competition.

    https://www.sequoiacap.com/article/

    Six questions in this example rubric

    1. High organic revenue growth (>20.0% for many years)
    2. Massive reinvestment runway (10x scale potential)
    3. High ROIC or path to high ROIC
    4. Moats (network, switching costs, ecosystems)
    5. Founder-led with significant ownership
    6. Pricing power

    These six questions receive attention in this example rubric. Their weights are choices, not proven odds of beating the market.

    Debt, spending, goodwill, and valuation still matter. They answer different questions:

  • They can reveal risk or a high purchase price.
  • They belong in the research even when they are not the main focus here.

    • Be careful with the backward-looking list

    Amazon, Meta, Nvidia, Google, Tesla, Netflix, Adobe, ASML, Shopify, and ServiceNow are historical examples. A list made afterward cannot identify the next group.

    Several showed these traits during their growth:

  • multi-year growth
  • TAM expansion
  • moats
  • pricing power
  • founder control
  • reinvestment flywheels

    • That does not make the following risk checks irrelevant:

  • D/E ratio
  • goodwill levels
  • SBC %
  • capex % of GP
  • S&M % thresholds

    • Treat these as risk checks, not return forecasts.

    Example Scoring System

    Low-Impact (baseline):

  • 1× multiplier

    • Medium-Impact:

  • 3× multiplier

    • Highest-Impact:

  • 7× multiplier

    • These are calibrated so total weight distribution matches:

  • 50–60.0% = Highest Impact
  • 30–35.0% = Medium Impact
  • 10–15.0% = Low Impact

    • 1. Highest-Impact Criteria (50–60.0% of total weight)

    This proposed scoring example gives these questions the most weight. That is a design choice, not a guarantee.

    A. Organic Revenue Growth >20.0% for many years

  • Multi-year >20.0% growth
  • Forward >20.0%
  • 10-year >20.0% sustainability
  • Organic, not purely M&A

      Why check it: sustained growth can matter, but a threshold does not predict a 100-fold stock return.

    • B. Massive Runway (10x+)

  • TAM expansion
  • Category tailwinds
  • Optionality

      Why: You need decades of compounding to win big.

    • C. Founder-Led With Skin in Game (≥10.0% ownership)

    Why check it: ownership can align incentives. It is not a substitute for evaluating management.

    D. Strong Moat + Moat Direction

  • Network effects
  • Switching costs
  • Ecosystem
  • Cost advantage
  • Customer love

      Why: Protects long-term compounding.

    • E. Pricing Power (Product not commodity)

    Why: Only products with pricing power can sustain margins during scaling.

    2. Medium-Impact (30–35.0% of weight)

    These checks look for operating and balance-sheet problems. Passing them does not identify an outlier winner.

    A. Revenue > $100M (escapes fragile stage)

    B. EBIT positive or trajectory to positive

    C. FCF positive after SBC

    D. ROIC >20.0% OR explosive path toward high ROIC

    E. Clean financials (no accounting/ethical issues)

    F. No existential binary risks

    G. No extreme external dependencies (rates, commodities, crypto)

    These checks may flag risks. They cannot identify future winners on their own.

    3. Low-Impact (10–15.0% weight)

    Useful context, but one ratio should not override the rest of the business.

  • Debt/Equity <2
  • Goodwill/Assets <15.0%
  • S&M <50.0% of GP
  • R&D >20.0% of GP
  • SBC <15.0% of GP
  • Fwd EV/GP <13x
  • Customer concentration
  • 75.0% recurring revenue
  • <75.0% non-USD revenue
  • CFO > NI
  • etc.

    • These are refinements.

    None can forecast exceptional returns on its own.