July 18, 2024
As I posted recently, after thirty years advising clients on Wealth Management, I have become very cynical of the merchants of doom who seem to enjoy nothing more than sowing fear amongst investors.
Typically, the bad news comes in the form of an imminent prediction about a stock market crash.
Another bad news bandwagon that some have jumped on is to sound alarm bells about ‘concentration risk’ – the fact that the biggest companies are accounting for a larger share of the overall market than they were a few years ago.
Let’s leave aside the rather interesting historical fact that the largest ten US-listed companies comprised about 100% of the market at the beginning of the 19th century, compared to 25% today.
Instead, we should remember that while the soaring share prices of Apple, Nvidia, and Google have been behind the recent increase, their market share is still lower than the top 10 stocks’ share of Wall Street in the 1960s / early 1970s (a time when large-cap dominance was dubbed ‘the Nifty Fifty’).
Perhaps more important is to recognise the importance of profit margin on recent trends.
Large companies today are much more profitable than they were historically—the top ten mega caps’ median profit margin is 28% today, compared to 11% in 2000 and 10% in 1973.
I’m not going to predict what will happen next, but investors need to remember that this is not a reprise of the 1999 Dotcom Bubble.
This time, the market is dominated by tech businesses with substantial profits, significant cashflow, incredible profit margins, and the protection of sizeable barriers to entry.
The key issue for investors is not so much ‘concentration risk’.
More important is how the ‘top ten’ is never static but is constantly changing.
Capturing this trend over time requires professional expertise rather than reacting to the guesses of the doom-mongers.
About Andrew Album
Andrew Album is a financial advisor and wealth manager licensed in the UK and Israel who works with leading firms in both countries.
With over thirty years of experience, Andrew helps individuals and families navigate financial planning, investment strategies, and wealth preservation.
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