You have done your research. You have pored over annual reports, monitored quarterly earnings, and sidestepped the common pitfalls. Your portfolio contains fifteen stocks you have strong conviction in. This year, twelve of them generated profits. Feeling confident, you compare your returns to the Nifty 500 index, only to find it has surged 22%, while your portfolio is up 16%. How is this possible when most of your picks were winners?
The Illusion of "Average" and the Reality of Cap-Weighting
The uncomfortable truth lies in a fundamental misconception. The index does not represent the performance of a typical or "average" stock. It reflects a cap-weighted outcome, where larger companies exert a greater influence. This means a few extraordinary winners can lift the entire index, while the median stock—the one in the exact middle of the pack—consistently lags behind. Therefore, your goal is not to beat an average; it is to consistently land your picks in the top 40-45% of all stocks every single year.
An extensive analysis of 18 years of Indian market data, from 2007 to 2025, quantifies this challenge. The data tracks the percentage of top 500 stocks (by market cap at each year's start) that outperformed the Nifty 500 in that calendar year. The long-term average is a sobering 45%. In a typical year, fewer than half the index's constituents manage to beat the index itself.
The pattern is revealing. In broad rally years like 2009, 2014, and 2023, the beat rate exceeded 55%. However, in years dominated by a narrow set of heavyweights—such as Reliance, HDFC Bank, or major IT stocks—the beat rate collapses. For instance, in 2008, 2013, and 2018, the index crushed nearly three-quarters of its own stocks, with beat rates as low as 25-30%. Cap-weighting concentrates returns in whatever is working at the moment, and that is usually a minority of companies.
Does a Longer Time Horizon Improve Your Odds?
A common defense from active investors is the long-term argument: "Give me three years, and the cream will rise to the top." The data firmly refutes this. When examining rolling three-year returns from periods like 2007-2009 through to 2023-2025, the average percentage of stocks beating the Nifty 500 drops to 42%, worse than the annual figure.
Only three periods out of eighteen saw more than half the stocks outperform: 2014-2016 (55%), 2015-2017 (53%), and 2021-2023 (53%). The stretch from 2016 to 2020 was particularly brutal, with beat rates in the mid-20s to mid-30s. The 2018-2020 period hit a low of just 25%, meaning three out of four stocks trailed the index over three full years.
Time doesn't help because underperformance compounds. A stock that lags by 8% annually for three years ends up roughly 25% behind. The index's winners pull further ahead, widening the gap. The median stock's return almost always lags the index's, with the gap sometimes reaching double digits.
The Extreme Concentration of Market Returns
The core of the challenge is the extreme concentration of wealth creation. The analysis identified the top 10, 20, and 50 best-performing stocks in each rolling three-year period and calculated their premium over the Nifty 500. The results are staggering and should give every stock picker pause.
Over 17 rolling periods, an equal-weight portfolio of the top 50 stocks would have delivered a 260% premium over the index. The top 20 stocks delivered a 392% premium, and the elite top 10 stocks delivered an astronomical 508% premium. These are ex-post numbers, assuming perfect foresight, but they illustrate a critical point: market returns are not distributed evenly; they are hyper-concentrated in a tiny cluster of outliers.
This means that to beat the index, a portfolio needs disproportionate exposure to these future super-performers. The catch is that these winners rotate. The top performers of one three-year period are rarely the top performers of the next. The data on persistence shows that only about 47% of stocks that beat the index in one three-year period continued to do so in the next. This figure falls to just 22% in the subsequent period (years 6-8). Past winners offer little guidance for future success.
The Self-Healing, Relentless Index
Another structural advantage of the index is its built-in renewal mechanism. Tracking the fate of the top 500 companies from 2007 reveals a relentless attrition. By 2024, only 43% (213 companies) remained in the top 500. A significant 17% were no longer trading (delisted, merged, or defunct), and 40% had dropped out of the ranking but were still trading.
The index is not passive; it is a systematic strategy with simple, ruthless rules: add stocks that grow large enough and remove those that shrink, all while weighting by market cap to let winners run. It is, in effect, a momentum strategy with automatic rebalancing. When you pick individual stocks, you are competing against a portfolio that quietly ejects its failures and promotes its successes without emotion or hesitation.
Key Takeaways for Investors
This analysis does not declare active stock picking futile. Some investors, both retail and professional, do outperform over long periods. However, it underscores that the base rate of success is low for everyone. The data is an argument for humility and a clear-eyed understanding of the odds.
For those engaged in active selection, the findings suggest several guiding principles: respect the market's momentum tilt, ensure your portfolio is diversified enough to have a chance of catching unexpected outliers, and rebalance intentionally to manage concentration risk. The index is a formidable adversary because of cold arithmetic, not abstract market efficiency. It guarantees ownership of the handful of stocks that will generate most of the wealth, while systematically discarding the worst performers.
The investors who succeed in beating the index over the long term are typically those who respected the difficulty of the task from the very beginning. The ones who fail are often those who underestimated it.
(The analysis and data referenced are based on the work of Anoop Vijaykumar, Head of Equity at Capital Mind Mutual Fund.)
