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Michael Mauboussin on Market Concentration, Capital Allocation & Attributes of Great Investors | #545
The Meb Faber Show - Better Investing
Exploring Market Concentration and Its Impact on Investment Strategies
Current market trends show that the top 10 stocks account for approximately 31-32% of market capitalization, reflecting a historical norm. Interestingly, the U.S. market is among the most diversified, yet it represents 60% of global market cap, indicating a significant influence on global markets. An analysis of economic profit demonstrates that the top 10 companies not only dominate market cap at 27% but also account for around 69% of aggregate economic profit, emphasizing the importance of return on invested capital over simple market share. Historical data reveals that owning the number one stock on an annual basis has underperformed significantly over a 65-year period, contrary to the recent decade where leading companies like Apple, Google, and Microsoft showed substantial returns. Furthermore, active management’s performance often lags when large-cap stocks outperform small caps, as evidenced by 80% of active managers owning stocks with smaller market capitalizations than the S&P 500 in 2023. This trend underscores the challenges faced by active managers in a large-cap-dominated market environment and the cyclical nature of market performance where small caps may excel during different economic periods.
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