After the Bell: How worried should we be about the world’s ten biggest companies?

I guess like most people, I’m an enormous fan of telling other people what to think and do, side-stepping most suggestions in this respect that might apply in the reverse. In a way, it’s inevitable. It would be difficult, if not impossible, to act if we didn’t believe our actions were correct. Action is predicated on belief; that’s how we roll.

But after many years of failure, I have come to learn the hard way, there is an exception to this rule: The stock market. When investing, it’s important to try to lose your natural inclination to tell the market what it should be doing, and rather listen to what it might be telling you.

The reason is simple: the stock market is designed to make you look like an idiot. It just will. It is partly for this reason that I have taken care over the years not to accumulate any wealth of any consequence. If I had, what would have happened is that I would have developed a convincing theory, and I would have lost thumping great chunks of that wealth going “all in” on it. And by “convincing theory” I mean a theory that I used to convince myself, not a theory that is in any way actually convincing.

I suspect this is the reason why people have financial advisers. It’s not necessarily that they trust their financial advisers to make them more money, although most do. It’s the desire to have someone to blame if things go wrong. It’s so much more satisfying than blaming yourself. 

The reason for this rather elongated introduction is that there is one respect in which global stock markets are currently hugely out of kilter, and I can’t help wondering what the markets are trying to tell us – if anything.

In a note to clients, Duncan Lamont, the Head of Strategic Research at investment bank Schroders, draws attention to an interesting statistic: global stock markets have become very top-heavy. Just to take one measure, the ten biggest stocks in the S&P 500 index currently make up a record 31% of that market. The average over the past 50 years is about 22%.



That is remarkable enough in itself, but it’s worth noting that a mere eight years ago, that proportion was sitting at around 17%. What grand change have we seen over the past eight years?

It’s not just something that has happened on the US stock market, Lamont points out. The US market itself has become very dominant in the global stock markets, growing to be 63% of the global market at the end of October (MSCI All Country World Index (ACWI) index) so international investors have ended up with a lot in US stocks and, with that, a lot in only ten stocks. Those ten make up nearly 18% of the global market, the same as Japan, the UK, China, France and Canada combined.

Lamont draws from this calculation that investors should beware because passive investors often lose after periods of concentration because concentration does unwind. For Lamont, it’s a demonstration of the utility of actively managed portfolios. Historically, deviating from the market has been a winning strategy when concentration has been high, he writes.

Uncharted territory