🤑 Which companies generate stock market returns?
The ones based on GPTs
Hendrik Bessembinder is an economist who has conducted fascinating research on the determinants of stock market returns in the United States over the past century. His conclusions are pretty simple. Most companies (and by extension most managers) destroy value. Stock market returns are overwhelmingly concentrated, in fact 2% of public companies drove 90% of wealth creation.
I was reminded of the work after venture investor
retweeted it with the observation that “long-term public market investing is venture capital investing, whether you like it or not.”
The outcomes are more stark than that. Last year, while helping some asset allocators think through the AI cycle, I analysed Bessembinder’s results through my frameworks.
I’ll share a brief excerpt here, as it’s super relevant. Just two caveats: this analysis is over a year old, and Bessembinder’s data only ran to the end of 2022. Nvidia alone has had a $3 trillion market cap since 2022, which only serves to support the case I made.
Regarding concentration, 2% of firms, approximately 600, accounted for 90% of all wealth creation. If your portfolio missed that 2%, and you had backed the rest of the market, you’d have lost money. And the concentration continues, 23 firms (less than 0.1% of the sample), account for 30% of returns.
Selection bias
The majority of top performers share a common trait: they are built upon the breakthrough general-purpose technology of the era. Consider the general-purpose technologies of the past 120 years or so: the internal combustion engine, telephony, electricity, and computing. As the table below shows, returns skew heavily towards those firms based on GPTs.