You’ve done your homework. You’ve read the annual reports, tracked quarterly results, and avoided the obvious traps. Your portfolio holds fifteen stocks you genuinely believe in. Twelve of them made money this year. Then you check the Nifty 500: up 22%. Your portfolio: up 16%. How does this happen? You didn’t pick duds. You made money. Yet you still trailed an index that, by definition, holds the “average” stock. The uncomfortable answer is that “average” is the wrong mental model.
The index doesn’t represent the typical stock. It represents the cap-weighted outcome, which means winners carry more weight than losers, and a few extraordinary performers drag the whole number up. The median stock, the one in the middle of the pack, almost always trails the index. Which means you’re not trying to beat “average.” You’re trying to land in the top 40-45% of all stocks. Every year. Consistently. We wanted to know: how hard is that, really? So we ran the numbers across 18 years of Indian market data.
Exhibit 1 shows the percentage of top 500 stocks (by market cap at the start of each year) that outperformed the Nifty 500 index in that calendar year. The long-term average: 45%. In a typical year, fewer than half the stocks in the index beat the index itself. Some years are kinder than others. In 2009, 2014, 2023, and a handful of other broad rallies, the beat rate crossed 55%. But in years like 2008 (28%), 2013 (30%), or 2018 (25%), the index crushed nearly three-quarters of its own constituents.
Notice the pattern: when markets are led by a narrow set of heavyweights, the years when Reliance or HDFC Bank or a handful of IT stocks do the heavy lifting, the beat rate collapses. Most stocks make money, but most stocks still lose to the index. Cap-weighting concentrates the index’s return in whatever’s working, and “whatever’s working” is usually a minority of names. This isn’t a retail investor problem. SPIVA data consistently shows globally most-actively managed equity funds underperform their benchmarks over 5-year periods. Even the professionals with Bloomberg terminals, research teams, and management access face the same challenge. Does time help? Not really. A common rebuttal: “I’m a long-term investor. Give me three years and the cream rises.”
Exhibit 2 tests this. We calculated rolling 3-year returns for every stock in the top 500 at the start of each period, from 2007-2009 through 2023-YTD2025. Then we asked: what percentage beat the Nifty 500 over that same window? The average drops to 42%, worse than the annual figure. Extending your horizon doesn’t improve your odds; it slightly worsens them.
Only three periods out of eighteen saw more than half the stocks beat the index: 2014-2016 (55%), 2015-2017 (53%), and 2021-2023 (53%). The rest, particularly the brutal 2016-2020 stretch, saw beat rates in the mid-20s to mid-30s. The 2018-2020 period hit a low of just 25%: three out of four stocks trailed the index over three full years. Why doesn’t time help? Because underperformance compounds. A stock that trails by 8% annually for three years isn’t slightly behind; it’s 25% behind. The index’s winners pull further ahead, and the gap widens.
Exhibit 3 compares the median stock’s 3-year rolling return with the Index, along with the 20th-80th percentile range. Note that both the stock and index returns do not consider dividends. In almost every period, the median stock lags the index. The gap varies, sometimes a few percentage points, sometimes double digits, but it rarely flips. What’s interesting is the upward dispersion. The 80th percentile often soars well above the index, sometimes by 50 or 100 percentage points. This tells you winners exist, and they win big. But they’re not the median; they’re the exception. Which brings us to the real question: just how big are these winners, and how much do they matter?
Exhibit 4 reveals something that should give every stock picker pause. For each rolling 3-year period, we identified the top 10, 20, & 50 best-performing stocks after the fact, and calculated their premium over the Nifty 500. The numbers are not close.
Over the 17 rolling periods from 2007-2009 to 2021-2023: Equal-Weight Portfolio of Average 3-Year Return Premium over Index Top 50 Stocks 260% Top 20 Stocks Top 10 Stocks 392% 508% These are ex-post numbers i.e. the excess return you would make if you had perfect foresight about the top performers. Returns aren’t distributed evenly across 500 stocks. They’re concentrated in a small cluster of extraordinary performers. The top 10-20 generate returns that look like they belong to a different asset class entirely.
You have to own the outliers
Here’s what this means in practice. If you pick 20 stocks randomly from the Nifty 500, your expected outcome is close to the median, which trails the index. To beat the index, you need disproportionate exposure to the handful of stocks that will deliver supernormal returns over your holding period. But there’s the catch: you don’t know which stocks those will be. The top 10 performers of 2019-2021 weren’t the top 10 of 2016-2018. The winners rotate. What looks like a consensus quality stock at the start of a period often delivers index-like returns, solid, but not enough to overcome the drag from your other positions that trail the median.
This is why concentration cuts both ways. A focused 15-stock portfolio could land several top performers and crush the index. Or it could miss all of them and badly underperform. The index, by holding everything and cap-weighting, guarantees exposure to the winners; it just also holds everything else. Stock picking isn’t about avoiding losers. Every portfolio has losers. It’s about owning enough of the handful of stocks that will land in the top 50, preferably the top 20, of a period you can’t preview.
But Winners don’t stay winners. What if we held on to the winners over the last three-year period? Would that help outperform?
Exhibit 5 tracks persistence. For each non-overlapping 3-year period from 2007-2009 onward, we identified stocks that beat the index. Then we asked: what percentage of those winners continued to beat the index in the next 3-year period? And the one after that? The answer: about 47% in years 3-5, and 22% in years 6-8. If you had 10 stocks all of which beat the index in one three-year period, 5 of them would’ve beaten the index in the next three-year period and 2 out of those 5 would go on to beat the index in the three-year period after that. Some periods show higher persistence (2011-2013 winners: 67% continued outperforming), others show collapse (2015-2017 winners: only 26% kept winning). But on average, knowing a stock beat the index last period tells you almost nothing about whether it will beat the index next period. This makes sense in light of what we’ve just seen. If the top performers return 400-500% over three years, they’ve been re-rated dramatically. The market has noticed. The edge is now in the price. Meanwhile, the next set of winners often emerges from names that were overlooked, undervalued, or simply not large enough to register, stocks that weren’t on anyone’s “quality” list three years prior.
The index is a self-healing organism
There’s one more reason the index is hard to beat, and it has nothing to do with stock selection
Exhibit 6 tracks what happened to the 500 stocks that comprised the top 500 by market cap in 2007. Where are they today?
• 85 (17%) are no longer trading at all-delisted, suspended, merged, or defunct
• 202 (40%) dropped out of the top 500 but are still trading
• Only 213 (43%) are still in the top 500. In other words, 57% of the original cohort is no longer in the index. They’ve been replaced by companies that grew into the top 500 over the intervening years, new and better companies, the mid-caps that became large-caps, the compounders that didn’t exist or weren’t large enough in 2007. The chart shows this attrition in real time. By 2012, only 70% of the original cohort remained in the top 500. By 2018, barely half. Today, 43%. The decline is relentless and one-directional. The index isn’t passive. It’s a systematic strategy with simple rules: add stocks that grow large enough, remove stocks that shrink. Weight by market cap, which means let winners run. This looks like doing nothing, but you can almost call it a momentum strategy with automatic rebalancing. When you pick stocks, you’re not just competing against 500 companies. You’re competing against a portfolio that quietly ejects its failures & promotes its successes. An active investor has to decide when to sell; the index does it automatically, without emotion.
What this means-and what it doesn’t
Let’s be clear about what this analysis does not prove: It doesn’t prove that active stock selection is futile. Some investors, retail and professional, have beaten the index over long periods. But “some” is doing a lot of work in that sentence. The base rate of success is low, and it’s low for everyone: retail or professional investors. The data doesn’t say outperformance is impossible. It says anyone who treats it as easy or inevitable, is either unfamiliar with the evidence or has something to sell you. It doesn’t prove that index funds are the only sensible choice. Investors have different goals, tax situations, and constraints that favour other approaches. It doesn’t prove that the current period will resemble the past. Market structure changes; what was true in 2007-2025 may not hold in 2025-2040. What it does prove is that the starting odds are against actively picking stocks. In a random year, roughly 55% of stocks will lose to the index. Over three years, roughly 58% will. The winners that drive index returns aren’t just good, they’re extraordinary outliers returning 5-10x over three years. And even if you identify this period’s winners, only about half of them will be next period’s winners. This is an argument for humility about the difficulty of the task.
How we think about this
We should be honest: we are not exempt from this. We run active quantitative strategies. We pick stocks, though not in the traditional bottom-up sense, but a quantitative factor-based approach. We believe we have edges worth pursuing, in process, in discipline, in the factors we target. But we hold no illusions that we’ve solved a problem that has humbled most of the global asset management industry. The index is not a punching bag; it’s a formidable adversary. Anyone in this business who claims a consistently easy victory over the index is telling you more about their marketing than their returns. What we can control is the process. And understanding the structural challenge shapes how we think:
Respect momentum: The survivorship data show that the index is effectively a momentum strategy. Stocks enter when they’re rising and exit when they’re falling. Fighting this structural tilt, buying beaten-down names because they’re “cheap”, means betting against a tailwind that has compounded for decades. Our process looks for stocks already demonstrating strength, because that’s where the next set of top performers often hides.
Diversify enough to own outliers: If returns are concentrated in the top 20-50 stocks, a 10-stock portfolio is a bet that you’ve identified most of them, which ironically increases the chances that you own none of the big winners. We’d rather hold enough names that we’re likely to own some of the unexpected winners, even if we can’t identify them in advance.
Rebalance with intention: The index lets winners run indefinitely, but it also concentrates risk. We trim positions not because we think they’ll stop winning, but because concentrated portfolios are fragile portfolios, and because no one can know which winners will persist.
The one thing to takeaway
Beating the index is harder than it looks, not because markets are efficient in some abstract sense, but because of cold arithmetic. The index is cap-weighted; the median stock trails it. A tiny fraction of stocks generate nearly all the wealth creation, returning 5x, 10x, 15x over three years, while most stocks deliver modest or negative real returns. Winners don’t persist reliably. And the index quietly replaces its losers with new winners while you’re left holding decisions you made years ago. The index doesn’t pick the best stocks. It just refuses to hold the worst ones for long, and guarantees you own the handful that will matter. None of this means you shouldn’t try or that we’ll stop trying to do better than the index. It means intellectual honesty requires acknowledging what you’re up against. The investors who do beat the index over the long term tend to share one trait: they respected the difficulty of the task from the start. The ones who blow up are usually the ones who thought it was easy.
(Author Anoop Vijaykumar is Head of Equity, Capital Mind Mutual Fund)
Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
