Power of a concentrated winning stock portfolio

June 27, 2024 3 min read

The Market Cap of Top Five US Companies Over 45 Years

A fascinating chart highlights the market cap of the five largest companies in the US markets over the last 45 years. This chart shows the percentage of the total S&P market cap these five companies represent. In the 1980s, it was around 18-19%, which then dropped to about 10-11% by the mid-1990s.

During the dot-com bubble, the top five companies’ share rose back to 18% before falling again to around 10-11% by the mid-2010s. Recently, in the last seven or eight years, the market cap of these top five companies has soared to 24%. This level of concentration in just five companies is unprecedented, with the remaining 495 companies accounting for only 76%.

The Impact of Market Concentration

The high concentration of market cap in a few companies significantly impacts the overall market. When the S&P 500 moves up, a large part of this movement is due to these top five or seven stocks, often referred to as the “magnificent seven.” Meanwhile, the rest of the market, especially the small-cap stocks, has struggled, being down by 10-12% in recent years. This concentrated flow of capital into a few large stocks skews the true picture of the market.

Weighted vs. Equal-Weighted Indexes

This concentration becomes evident when comparing the S&P 500’s market cap-weighted index to an equal-weighted index. The market cap-weighted index, up 13.9% by June 12 this year, heavily relies on the top-performing stocks. In contrast, the equal-weighted index, where all 500 stocks have the same weight, is up only 4%. This significant difference shows how much the top stocks influence the overall index’s performance.

To consistently outperform the index, it’s crucial to invest in the leading stocks of the index. For example, in the local context, selecting the top ten stocks from the Nifty 50 universe has allowed certain portfolios to beat the Nifty. This strategy involves continuously updating the portfolio with current leaders. When market leadership changes, the portfolio must also adjust to include new leading stocks.

Following Market Leaders

Investing in the current market leaders is essential. You cannot predict which stocks will lead the market in the future; you can only buy them once they start showing leadership. If your portfolio includes S&P 500 stocks that have never reached the top in the past eight years, it likely underperforms the benchmark index. This underperformance has led many investors to prefer index funds, which generally perform better than many active portfolios.

Momentum Investing !

The idea is to focus on the strength of the index stocks performing well. By selecting and investing in winning stocks, you can potentially outperform the index. Avoiding laggards and sticking with the market leaders can lead to better investment returns. This momentum investing strategy emphasizes staying with strong, high-performing stocks to maximize gains.

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    Power of a concentrated winning stock portfolio