Due to the trillions of dollars blindly going into index funds, thereby purchasing these stocks, are these five companies' stock prices way too artificially high ?
I buy index. I have a portfolio of 500 large American companies, who are publicly traded, and follow SEC regulations, where gross negligence and gross fraud are mostly avoided, and which maybe a third also have global operations.
It’s a basket of restive safe equity, diversified across industry but not much in terms of nationality. Beyond that I don’t know what’s in it and don’t particularly need to care
Wow, no disrespect but that made me laugh. Worldcom? Enron? AIG? Lehman? I could go on but you get the gist.
The only thing an index fund (I'll assume SPY for sake of argument) gets you is diversity in number of holdings, but that benefit is greatly reduced when the individual components are heavily skewed in weight. The same applies to industry (and probably always did).
In an ideal world that diversity protects you from a one off calamity (ch 7/11) as each holding is expected to be relatively small and not likely to affect many other companies or the entire index to any great extent. That too goes out the window with the current concentrations.
> The only thing an index fund (I'll assume SPY for sake of argument) gets you is diversity in number of holdings
"only thing"? "only"? That's huge:
> Famed economist and Nobel Prize winner Harry Markowitz called diversification “the only free lunch in finance.” The thought is that by diversifying, an investor gets the benefit of reduced risk while sacrificing little in expected returns over the long run.
You are missing the point. The S&P 500 and most large mutual funds are not anywhere near as diversified as typical investors believe them to be and have become less so over the past few years. Investors buy them for the perception of great diversification as well as the ease of purchase/sale.
Diversity in number of holdings works well if the holdings are not heavily overweight/underweight and are not highly correlated. So RSP (equal weight S&P) would meet the definition of well diversified in respect to weighting. Unfortunately, equities have been trending towards an increasing degree of correlation which can't be adjusted for when an etf is constructed mechanically based on market cap.
I always urge friends, family etc. to look at the components of the various funds and etfs they hold as they will be shocked to find that, in aggregate, a significant portion of their position is in 10 or 15 stocks. For some that may be acceptable, especially if they hold other non highly correlated asset classes. For others, they need to take a little more time or consult a professional to research how to better balance that risk. As just one example, VXF attempts to capture the return of the non-S&P 500 equities.
I said "where gross negligence and gross fraud are mostly avoided"
I know about Worldcom Enron AIG Lehman... Gross fraud and negligence still isn't condoned. Buying the index is still better than trying to guess which of the 500 aren't performing fraud. Laugh all you want; best of luck to you
Better to "blindly" invest in a passive index fund (S&P 500, Russell 3000, etc) than to try to pick an individual stocks. Most people will get positive results/returns on the former and worse results for the latter.
I think you mean passively managed mutual fund vs actively managed mutual fund. You can have a passively managed mutual fund that follows an index with extremely low expense ratios like FXAIX or FSKAX.
But since most index funds are market cap weighted, wouldn't the other 495 companies (assuming s&p 500 index, if you buy a all-cap index it might be 2000+ companies) go up the same % as well?
That's real money being invested in these companies. Index funds buy stock and never sell it. It's real money, buying real shares, that takes the stock out of circulation, that don't get day traded.
Anyway, not to be caught in semantics, but I believe stocks can be priced high and very high, but that doesn't mean it has to fall. The index fund system props up the prices forever.
Try the ETF with the symbol "RSP". It's an S&P 500 fund, but each of the 500 is equally weighted. In other words 0.2% of the fund. The theory is that the larger companies in the S&P 500 have less growth potential, or are already overvalued, compared to the smaller companies.
> Since mutual funds trade directly through the fund manager, the manager may need to sell shares of the fund's investments to generate cash needed to cover redemptions. This causes mutual funds to buy and sell within the fund more frequently than ETFs. And every time the trades generate net capital gains within the fund, it creates a taxable event for investors.
"Mutual funds are legally required to pay out capital gains to their shareholders each year," Jessee says. Even if you don't sell your shares, you may get a tax bill for gains incurred within the fund. This could happen even in a fund that's losing value.
Assuming that it is held in a taxable account. For most people, for most of their portfolio, it will probably held in a tax-sheltered account (e.g., 401(k) retirement in US).
If you've maxed out all your sheltered accounts, and are worried about dealing tax events in non-sheltered ones, that's a pretty good position to be in—financially speaking.
This is a silly statement - there’s plenty of middle class people who hold mutual funds who are hit with capital gains taxes every year from distributions from the fund.
> Approximately 6 in 10 households in the United States own securities investments—typically through taxable accounts, IRAs or employer-sponsored retirement plans. However, this figure drops to a little over 3 in 10 if only taxable investments are considered. Households that own taxable accounts are more likely to be older, affluent, college educated and white relative to households with only retirement accounts or households without investment accounts.
You don’t know what you’re talking about - taxes are never a ‘good problem’. ‘Good problem’ doesn’t even make any sense and you using it here shows you don’t know the difference between income and wealth.
Having so much money that you've maxed out and over-flowed tax-sheltered accounts—accounts that many people aren't even able to afford—to the point that you're now worrying about tax efficiency is a not a bad situation to be in IMHO.
> Try the ETF with the symbol "RSP". It's an S&P 500 fund, but each of the 500 is equally weighted.
Note that an equal-weighted index will tend be more volatile, have higher turnover (i.e. more trading costs and short-term tax effects) and be sensitive to value over momentum in comparison with a market-cap weighted index like the S&P 500. The former have outperformed the latter over the last decade (EDIT: no, it hasn’t. I was looking at a biased source.)
Have equal weighted indexes outperformed market cap weighted indexes in the last decade?
Morningstar shows VOO with a greater total return than RSP for past 5 years and since inception. I didn’t see past 10 years at a quick glance, but I imagine it’s the same.
I don't know why you would limit your dataset to the last decade. That doesn't seem a valid analysis, even though it might be easier to lookup with free tools online.
My preference would be holding normal SPY and hedge the overweighted NASDAQ stocks with short NQ futures. In this way you only need to rebalance the NQ futures which benefits from 60/40 rule with better tax rate.
The 60/40 rule cuts both ways. You are also subject to daily market to market cash/margin drawdowns.
It is probably easier to just buy RSP and then buy virtually any 'market' or tech etf/mutual fund to round up the top 10-20% weighting as you want it. The reason I say any will do is that there is little difference in the holdings of most of the etfs and funds.
That is not true at all. RSP has for many years outperformed SPX over many different time horizons. It really is not until 2019 that there is a significant underperformance which also coincides with the outsized top 10 market caps.
I'm not sure; Coca Cola could start investing money and start buying up other food & drink brands.
I mean could you have imagined 10, 20 years ago that Disney would start to gobble up other companies like some weird Shoggoth monstrosity and multiply its stock value by 5-6 times?
All of which are still massive companies, with Walmart pulling in half a trillion per year in revenue, double that of Apple or Amazon. Stock market value only tells part of the story (that of the richest getting richer).
Walmart has a well-understood business model, and so there is less uncertainly/risk, which means that investors generally accept lower returns for greater certainty.
The impact and revenues of tech companies is more uncertain, which is more risky, so investors are asking for more return in exchange for taking on that risk.
Recent video by Ben Felix of PWL Capital on the topic, "Investing in Technological Revolutions":
> Exciting new technologies, and the companies that create them, seem like obvious investment opportunities. Why wouldn’t you want to invest in the companies leading a new world-changing technological paradigm?
Some of the past recent he's found has shown that investing in a company on the way to being a Top 10 gets you good returns, but once a company is in the Top 10 its returns actually lag the market average.
As for income/wealth disparity: redistribution was used to good effect post-WW2 with high marginal tax rates, and it's also why the idea of a 'baby bond' is gaining some traction.
I'd have been surprised if it had turned out otherwise. I'd expect some kind of power law distribution, and it's not news that the biggest sticks are, well, huge. If the distribution falls away quickly enough, the result follows.
I don't think it's fair to say it's one industry. Apart from the fact that they heavily use the internet, can you really say that Amazon and Facebook are the same industry? One is a social network, the other is a retailing and infrastructure shop
It's happened with basically all industries: oil, canal building, rail roads, cars. Even bicycles:
> Technological revolutions are often accompanied by substantial stock price reversals, but previous literature has produced competing explanations for why this is the case. This paper brings new evidence to this debate using data from the innovation-driven British Bicycle Mania of 1895-1900, in which cycle share prices rose by over 200 per cent before collapsing by more than 75 per cent. These price patterns are not fully explained by fundamentals or by changes in the nature of risk associated with cycle shares. Instead, the evidence from the Bicycle Mania supports the hypothesis of Perez (2009), who argues that new technology, high short-term profits, and loose monetary conditions increase the level of speculative investment, ‘decoupling’ share prices from fundamentals.
Recent video by Ben Felix of PWL Capital on the topic, "Investing in Technological Revolutions":
> Exciting new technologies, and the companies that create them, seem like obvious investment opportunities. Why wouldn’t you want to invest in the companies leading a new world-changing technological paradigm?
I'm not sure whether people understand just how big of a problem this is. Resilient economies are well-balanced economies. When Big Tech falls - and it will eventually fall, because no industry is immune to corrections or busts - - the effect on the wider economy will be all the greater. The greater a share of the stock market that Big Tech holds, the larger the blast radius their failure will impose on the wider economy.
That FAANG constitutes such a large part of major market indices communicates a failure on the part of regulators. Not just the kind of regulation that technologists care about, i.e. protecting free software and open access, but economic regulation as well, that tries to smooth out the business boom and bust cycles and care about the health of the wider American economy.
And it isn't just FAANG. Look at Disney and Comcast and all the other conglomerates. The SEC and FTC have totally failed our country in the 21st century.
I frequently think about the fact that such organizations, from the outside, seem like the people now working there have forgotten what they are supposed to be doing for the American people.
The most prominent example I can think of is Microsoft getting in all this trouble over bundling a browser with Windows and yet this proliferation of forced App Stores runs rampant in the industry.
Where in world is the FTC now? All of these people should be fired. They’ve been asleep for 20 years.
You may be interested in the book Goliath by Stoller:
> Americans once had a coherent and clear understanding of political tyranny, one crafted by Thomas Jefferson and updated for the industrial age by Louis Brandeis. A concentration of power, whether in the hands of a military dictator or a JP Morgan, was understood as autocratic and dangerous to individual liberty and democracy. This idea stretched back to the country’s founding. In the 1930s, people observed that the Great Depression was caused by financial concentration in the hands of a few whose misuse of their power induced a financial collapse. They drew on this tradition to craft the New Deal.
> In Goliath, Matt Stoller explains how authoritarianism and populism have returned to American politics for the first time in eighty years, as the outcome of the 2016 election shook our faith in democratic institutions. It has brought to the fore dangerous forces that many modern Americans never even knew existed. Today’s bitter recriminations and panic represent more than just fear of the future, they reflect a basic confusion about what is happening and the historical backstory that brought us to this moment.
> The true effects of populism, a shrinking middle class, and concentrated financial wealth are only just beginning to manifest themselves under the current administrations. The lessons of Stoller’s study will only grow more relevant as time passes. Building upon his viral article in The Atlantic, “How the Democrats Killed Their Populist Soul,” Stoller illustrates in rich detail how we arrived at this tenuous moment, and the steps we must take to create a new democracy.
I have no knowledge in this field whatsoever, but is this more an indication that we shouldn't be using the S&P 500 and similar indices as an overall indicator of the performance of the economy, is there value in looking at these indices absent of Big Tech?
correlation between all stocks in the S&P 500 is so high that removing big tech makes little difference.
Also, a major part of the problem in my view is the blind indexing of equities that most investors use for the bulk of their portfolio. Market cap weighting essentially results in what essentially a momentum overlay: new money is allocated disproportionately to the stocks with the highest market cap, resulting in those stocks going up even more.
> Market cap weighting essentially results in what essentially a momentum overlay: new money is allocated disproportionately to the stocks with the highest market cap, resulting in those stocks going up even more
New money is allocated exactly proportionally to a stock's market cap in a cap-weighted index fund, by definition. New money into such funds can't disproportionally increase the price of one stock in the index versus another.
Sorry, I phrased that incorrectly/poorly. What I meant to say is that market cap weighting allocates more money to stocks that have a higher market cap (and the stocks got that way by going up in the past), pushing up the price even more.
This wouldn't be true if all shares of a company were all trading at the same time, but that's not the case. The number of available shares is more constrained than the total free floating market cap would suggest.
> This paper argues that the two boom and bust episodes of the turn of the Century –the Internet mania and crash of 1990s and the easy liquidity boom and bust of 2000s– are two distinct components of a single structural phenomenon. They are essentially the equivalent of 1929 developed in two stages, one centred on technological innovation, the other on financial innovation. Hence, the frequent references to that crash, to the 1930s and to Bretton Woods, are not simple journalistic metaphors for interpreting the “credit crunch” and its solution, but rather the intuitive recognition of a fundamental similarity between those events and the current ones. The paper holds that such major boom and bust episodes are endogenous to the way in which the market economy evolves and assimilates successive technological revolutions. It will discuss why it occurred in two bubbles on this occasion; it examines the differences and continuities between the two episodes and presents an interpretation of their nature and consequences.
I would suspect that most of the stock markets over time are distributed as a power law.
These distributions come up all over the place, from the sizes of asteroids, to the populations of cities. I'm not sure exactly why this is, but I seem to recall that it's related to the integrals of normal distributions.
> I'm not sure whether people understand just how big of a problem this is.
I'm usually the last to defend the construction of the US economy, but I think this is a bit of an overreaction. The stock market is not the economy. Big Tech bubbles are bad, but this isn't 2008 where people lost their houses because of financial engineering.
I think the bigger story (and issue) is just how few people are involved in and benefiting from Tech. These companies have massive market caps because they employ a tiny amount of people relative to how much money they make. For every one tech worker making high six figures there are a 50 people doing low-level healthcare service work. The vast majority of Americans own trivial amounts of stock, so they don't even benefit indirectly from the Tech bubble. All of this is just exacerbating the radical divergence of the haves and have-nots in our economy.
>I'm not sure whether people understand just how big of a problem this is. Resilient economies are well-balanced economies.
You seem to be under the misconception that the stock market somehow reflects the actual economy, in fact you seem to think that the stock market is the economy.
Those "top 5" companies taken together are less than 5% of the actual US economy, regardless of whichever way you want to calculate that (revenue/profit+wages vs GDP, ...)
The ones hurt by an investment failing are just the investors themselves, which is the whole point of investment. You take the risk and reap the rewards.
The only exception is when a "too big to fail" whatever (this narrative is complete bs btw) made bad investments again, so the government, and by proxy the taxpayer, steps in to finance the gambling addiction of people who are politician's retirement plans. Now you have made a considerable impact on the actual economy.
> The ones hurt by an investment failing are just the investors themselves, which is the whole point of investment. You take the risk and reap the rewards.
Counter-intuitively, investing in the Top 10 stocks has actually gotten you worse results than the market average.
If you took Top 10 stocks at the beginning of each decade (1920, '30, …, 2010), and followed how it did for that decade (e.g., 1920-1929) it would done worse than the market average (by 1.51% annually on average):
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[ 3.4 ms ] story [ 127 ms ] threadIt’s a basket of restive safe equity, diversified across industry but not much in terms of nationality. Beyond that I don’t know what’s in it and don’t particularly need to care
The only thing an index fund (I'll assume SPY for sake of argument) gets you is diversity in number of holdings, but that benefit is greatly reduced when the individual components are heavily skewed in weight. The same applies to industry (and probably always did).
In an ideal world that diversity protects you from a one off calamity (ch 7/11) as each holding is expected to be relatively small and not likely to affect many other companies or the entire index to any great extent. That too goes out the window with the current concentrations.
"only thing"? "only"? That's huge:
> Famed economist and Nobel Prize winner Harry Markowitz called diversification “the only free lunch in finance.” The thought is that by diversifying, an investor gets the benefit of reduced risk while sacrificing little in expected returns over the long run.
* https://www.bizjournals.com/milwaukee/news/2018/10/03/invest...
* https://en.wikipedia.org/wiki/Harry_Markowitz
What's the alternative anyway? Throwing darts at listing of stocks? Asking Orlando the cat?
* https://en.wikipedia.org/wiki/Orlando_(cat)
Diversity in number of holdings works well if the holdings are not heavily overweight/underweight and are not highly correlated. So RSP (equal weight S&P) would meet the definition of well diversified in respect to weighting. Unfortunately, equities have been trending towards an increasing degree of correlation which can't be adjusted for when an etf is constructed mechanically based on market cap.
I always urge friends, family etc. to look at the components of the various funds and etfs they hold as they will be shocked to find that, in aggregate, a significant portion of their position is in 10 or 15 stocks. For some that may be acceptable, especially if they hold other non highly correlated asset classes. For others, they need to take a little more time or consult a professional to research how to better balance that risk. As just one example, VXF attempts to capture the return of the non-S&P 500 equities.
I know about Worldcom Enron AIG Lehman... Gross fraud and negligence still isn't condoned. Buying the index is still better than trying to guess which of the 500 aren't performing fraud. Laugh all you want; best of luck to you
Evidence for this has been around for decades:
* https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street
https://money.usnews.com/investing/investing-101/articles/et...
That's real money being invested in these companies. Index funds buy stock and never sell it. It's real money, buying real shares, that takes the stock out of circulation, that don't get day traded.
Anyway, not to be caught in semantics, but I believe stocks can be priced high and very high, but that doesn't mean it has to fall. The index fund system props up the prices forever.
That’s the nice thing with the market cap weighted SP500 funds, no tax consequences from rebalancing.
But you could plug “RSP” into a tax-advantaged account.
Edit: You can owe taxes even if you don’t personally buy/sell.
As a fund shareholder, you could be on the hook for taxes on gains even if you haven't sold any of your shares.
https://investor.vanguard.com/investing/taxes/mutual-funds-e...
https://money.usnews.com/investing/investing-101/articles/et...
> Since mutual funds trade directly through the fund manager, the manager may need to sell shares of the fund's investments to generate cash needed to cover redemptions. This causes mutual funds to buy and sell within the fund more frequently than ETFs. And every time the trades generate net capital gains within the fund, it creates a taxable event for investors.
"Mutual funds are legally required to pay out capital gains to their shareholders each year," Jessee says. Even if you don't sell your shares, you may get a tax bill for gains incurred within the fund. This could happen even in a fund that's losing value.
If you've maxed out all your sheltered accounts, and are worried about dealing tax events in non-sheltered ones, that's a pretty good position to be in—financially speaking.
> Approximately 6 in 10 households in the United States own securities investments—typically through taxable accounts, IRAs or employer-sponsored retirement plans. However, this figure drops to a little over 3 in 10 if only taxable investments are considered. Households that own taxable accounts are more likely to be older, affluent, college educated and white relative to households with only retirement accounts or households without investment accounts.
* PDF: https://www.sec.gov/spotlight/fixed-income-advisory-committe...
The 3-in-10 would also have sheltered accounts:
> Importantly, most of these taxable investor households (89 percent) also own a retirement account like a 401(k) or IRA.
I stand by my statement: most people don't have to worry about tax events in mutual funds, and those that are in the situation have a 'good problem'.
Note that an equal-weighted index will tend be more volatile, have higher turnover (i.e. more trading costs and short-term tax effects) and be sensitive to value over momentum in comparison with a market-cap weighted index like the S&P 500. The former have outperformed the latter over the last decade (EDIT: no, it hasn’t. I was looking at a biased source.)
Morningstar shows VOO with a greater total return than RSP for past 5 years and since inception. I didn’t see past 10 years at a quick glance, but I imagine it’s the same.
No, it hasn’t. I had a bad source. Thank you.
It is probably easier to just buy RSP and then buy virtually any 'market' or tech etf/mutual fund to round up the top 10-20% weighting as you want it. The reason I say any will do is that there is little difference in the holdings of most of the etfs and funds.
Historical performance of RSP has always lagged behind SPX
ref: https://stockcharts.com/freecharts/perf.php?RSP,SPY
change the window size to whatever time horizon you want.
I mean could you have imagined 10, 20 years ago that Disney would start to gobble up other companies like some weird Shoggoth monstrosity and multiply its stock value by 5-6 times?
Of course, they're panicking over that. Of course they're trying to find growth. But they can't find it yet.
The fact is, they own so many brands in other beverage categories already. They own 500 beverage brands.
The impact and revenues of tech companies is more uncertain, which is more risky, so investors are asking for more return in exchange for taking on that risk.
Recent video by Ben Felix of PWL Capital on the topic, "Investing in Technological Revolutions":
> Exciting new technologies, and the companies that create them, seem like obvious investment opportunities. Why wouldn’t you want to invest in the companies leading a new world-changing technological paradigm?
* https://www.youtube.com/watch?v=UZnVt_CvL3k
Some of the past recent he's found has shown that investing in a company on the way to being a Top 10 gets you good returns, but once a company is in the Top 10 its returns actually lag the market average.
As for income/wealth disparity: redistribution was used to good effect post-WW2 with high marginal tax rates, and it's also why the idea of a 'baby bond' is gaining some traction.
> Technological revolutions are often accompanied by substantial stock price reversals, but previous literature has produced competing explanations for why this is the case. This paper brings new evidence to this debate using data from the innovation-driven British Bicycle Mania of 1895-1900, in which cycle share prices rose by over 200 per cent before collapsing by more than 75 per cent. These price patterns are not fully explained by fundamentals or by changes in the nature of risk associated with cycle shares. Instead, the evidence from the Bicycle Mania supports the hypothesis of Perez (2009), who argues that new technology, high short-term profits, and loose monetary conditions increase the level of speculative investment, ‘decoupling’ share prices from fundamentals.
* https://www.econstor.eu/bitstream/10419/148345/1/87292534X.p...
Recent video by Ben Felix of PWL Capital on the topic, "Investing in Technological Revolutions":
> Exciting new technologies, and the companies that create them, seem like obvious investment opportunities. Why wouldn’t you want to invest in the companies leading a new world-changing technological paradigm?
* https://www.youtube.com/watch?v=UZnVt_CvL3k
That FAANG constitutes such a large part of major market indices communicates a failure on the part of regulators. Not just the kind of regulation that technologists care about, i.e. protecting free software and open access, but economic regulation as well, that tries to smooth out the business boom and bust cycles and care about the health of the wider American economy.
The most prominent example I can think of is Microsoft getting in all this trouble over bundling a browser with Windows and yet this proliferation of forced App Stores runs rampant in the industry.
Where in world is the FTC now? All of these people should be fired. They’ve been asleep for 20 years.
> Americans once had a coherent and clear understanding of political tyranny, one crafted by Thomas Jefferson and updated for the industrial age by Louis Brandeis. A concentration of power, whether in the hands of a military dictator or a JP Morgan, was understood as autocratic and dangerous to individual liberty and democracy. This idea stretched back to the country’s founding. In the 1930s, people observed that the Great Depression was caused by financial concentration in the hands of a few whose misuse of their power induced a financial collapse. They drew on this tradition to craft the New Deal.
> In Goliath, Matt Stoller explains how authoritarianism and populism have returned to American politics for the first time in eighty years, as the outcome of the 2016 election shook our faith in democratic institutions. It has brought to the fore dangerous forces that many modern Americans never even knew existed. Today’s bitter recriminations and panic represent more than just fear of the future, they reflect a basic confusion about what is happening and the historical backstory that brought us to this moment.
> The true effects of populism, a shrinking middle class, and concentrated financial wealth are only just beginning to manifest themselves under the current administrations. The lessons of Stoller’s study will only grow more relevant as time passes. Building upon his viral article in The Atlantic, “How the Democrats Killed Their Populist Soul,” Stoller illustrates in rich detail how we arrived at this tenuous moment, and the steps we must take to create a new democracy.
* https://www.goodreads.com/book/show/40538538-goliath
There's been a back and forth over the last century on this topic.
What I was more thinking of is that the S&P 500 is top heavy with Big Tech stocks, is it better to look an index absent of the Big Tech stocks?
Also, a major part of the problem in my view is the blind indexing of equities that most investors use for the bulk of their portfolio. Market cap weighting essentially results in what essentially a momentum overlay: new money is allocated disproportionately to the stocks with the highest market cap, resulting in those stocks going up even more.
New money is allocated exactly proportionally to a stock's market cap in a cap-weighted index fund, by definition. New money into such funds can't disproportionally increase the price of one stock in the index versus another.
This wouldn't be true if all shares of a company were all trading at the same time, but that's not the case. The number of available shares is more constrained than the total free floating market cap would suggest.
In 1964 the five biggest made up 27.60%:
* https://theirrelevantinvestor.com/2020/04/21/the-only-thing-...
In 1964, AT&T alone made up 8.90% and in 1969 IBM alone made up 9.00%.
The author of this story needs to look into history more and go back more than just thirty years.
Companies and industries rise and fall and have for centuries in the stock market:
* https://en.wikipedia.org/wiki/Technological_Revolutions_and_...
> This paper argues that the two boom and bust episodes of the turn of the Century –the Internet mania and crash of 1990s and the easy liquidity boom and bust of 2000s– are two distinct components of a single structural phenomenon. They are essentially the equivalent of 1929 developed in two stages, one centred on technological innovation, the other on financial innovation. Hence, the frequent references to that crash, to the 1930s and to Bretton Woods, are not simple journalistic metaphors for interpreting the “credit crunch” and its solution, but rather the intuitive recognition of a fundamental similarity between those events and the current ones. The paper holds that such major boom and bust episodes are endogenous to the way in which the market economy evolves and assimilates successive technological revolutions. It will discuss why it occurred in two bubbles on this occasion; it examines the differences and continuities between the two episodes and presents an interpretation of their nature and consequences.
* PDF: http://www.carlotaperez.org/downloads/pubs/C.PEREZ_CJE_Doubl...
These distributions come up all over the place, from the sizes of asteroids, to the populations of cities. I'm not sure exactly why this is, but I seem to recall that it's related to the integrals of normal distributions.
I'm usually the last to defend the construction of the US economy, but I think this is a bit of an overreaction. The stock market is not the economy. Big Tech bubbles are bad, but this isn't 2008 where people lost their houses because of financial engineering.
I think the bigger story (and issue) is just how few people are involved in and benefiting from Tech. These companies have massive market caps because they employ a tiny amount of people relative to how much money they make. For every one tech worker making high six figures there are a 50 people doing low-level healthcare service work. The vast majority of Americans own trivial amounts of stock, so they don't even benefit indirectly from the Tech bubble. All of this is just exacerbating the radical divergence of the haves and have-nots in our economy.
You seem to be under the misconception that the stock market somehow reflects the actual economy, in fact you seem to think that the stock market is the economy.
Those "top 5" companies taken together are less than 5% of the actual US economy, regardless of whichever way you want to calculate that (revenue/profit+wages vs GDP, ...)
The ones hurt by an investment failing are just the investors themselves, which is the whole point of investment. You take the risk and reap the rewards.
The only exception is when a "too big to fail" whatever (this narrative is complete bs btw) made bad investments again, so the government, and by proxy the taxpayer, steps in to finance the gambling addiction of people who are politician's retirement plans. Now you have made a considerable impact on the actual economy.
Counter-intuitively, investing in the Top 10 stocks has actually gotten you worse results than the market average.
If you took Top 10 stocks at the beginning of each decade (1920, '30, …, 2010), and followed how it did for that decade (e.g., 1920-1929) it would done worse than the market average (by 1.51% annually on average):
* https://www.youtube.com/watch?v=foqswJT3Spc
apple: invented modern computing
google: makes the internet
amazon: earth's store
facebook: like button