the entire gain in the U.S. stock market since 1926 is attributable to the best-performing four percent of listed stocks.
It’s stating nothing more than what we know. If only a few “superstar” stocks drive the majority of earning (and some like ADP and Altria spin off many other successful companies), it’s all the more reason to diversify. If we just pick a few stocks, what are the chances we’ll have a proportional amount of those mega winner 4% stocks? Not good, despite how great a stock picker you think you are. Just look at my thought experiment for details. After all, if Harvard’s endowment could hire the best and brightest and still underperform the market, despite their pedigree and venture into “alternative investments”, how well can you as an individual do?
In other news, there is a similar superstar effect in the labour market.
The recent fall of labor’s share of GDP in numerous countries is well-documented, but its causes are poorly understood. We sketch a “superstar firm” model where industries are increasingly characterized by “winner take most” competition, leading a small number of highly profitable (and low labor share) firms to command growing market share.
The winners are disruptive because they are more efficient, able to do more with fewer workers. This is not much solace to those displaced as a result of old firms going under.
To survive in this world, we need to learn the skills of superstars. Stay in the few remaining jobs that remain, save and invest like crazy, and start our own businesses. That’s the key to success. My book is your guide to this.