Chapter 47: The Survivors, Thrivers, Disruptors and Wealth Creators of the 2020s

Dear Clients,

In past investment journal installments, we touched on how a handful of companies produce the vast majority of wealth creation in US equity markets. We termed this theme “bifurcation” and even posited that in an era of rapidly digitizing share shifts, that this theme would be even more pronounced this decade. For example, just as the market became accustomed to generative AI in 2023 – AI which would create its own content – there is now a new form of AI called Agentic AI. These are AI collaborators that can reason, solve problems, and apply decision frameworks to help improve user performance and profitability. In this installment, we would like to further explore the topic of disruption in a rapidly evolving landscape, delving into the survivorship characteristics of the leading wealth creating companies, how the wealth gap has shifted over time, and the implications for investors moving forward.

It may come as a surprise to readers that based on a Bank of America study, the top 3% of US companies have generated 100% of the net wealth in the US stock market since 1926 (Exhibit 1). This means that 97% of companies did not contribute any stock market wealth. Furthermore, among the top 3% that did generate wealth, the companies’ longevity characteristics are becoming shorter and briefer, due to disruptions and innovations. In other words, not only are winning companies few and far between, but their average lifespan is in decline (Exhibit 2). This means that the hit ratio of finding a successful investment to hold over a long timeframe is also in decline.

From a contrarian perspective, this produces tremendous opportunity for investment practices such as ourselves. If we can skillfully identify the handful of survivors and thrivers in the current market paradigm, with a relatively high hit ratio, we would expect our performance characteristics to be radically different than the benchmark (i.e., the 97% of companies that failed to produce any wealth). Indeed, our portfolio characteristics reflect the top 3% statistic that Bank of America referenced. As our portfolio filters the top 1% of S&P500 companies for a success ratio of 60-65%, this would mean that our holdings reflect approximately the top half percent of wealth creators in the S&P500.

Exhibit 1: 3% of companies have created 100% of shareholder wealth since 1926

Exhibit 2: Company lifespan is diminishing

*Source (Exhibit 1 & 2): Bank of America Thematic Investing – “The World in 2030”

In finance, this term of many failures for every visible success is termed “survivorship bias.” This means that the companies we visibly see in the public markets who are fruitful wealth creators have successfully navigated many paradigm shifts and found the corridors of opportunity, while their peers did not. This underpins our working hypothesis that markets are not efficient, not even the large cap S&P500. Inefficiency creates opportunity to construct portfolios that do not mirror the market, and therefore outperform by producing durably high returns on invested capital.

Charlie Munger once remarked “Time is the greatest friend of an exceptional business. It is the greatest enemy of a mediocre business.” We would tend to agree. Because of the compounding effects of capital over time, great companies are able to realize significant returns on their reinvestment. This widens the wealth gap compared to companies who are not able to produce this effect. In an age of disruption wherein company lifespans are also declining, there is a premium on companies that successfully compound capital for prolonged periods of time, returning to our original point that it is primarily compounding growth characteristics that have driven the vast majority of shareholder value creation over the last century. Finally, we will remind clients that value recognition requires clients not to equate risk with the same thing as volatility, for in times of volatility, investors who embrace that with a steady mindset tend to realize positive forward-looking results.

We hope clients have found this installment to be eye-opening.

Warmest regards,

Grace Wang | Senior Portfolio Manager

Samuel Jang, CFA | Investment Associate

Leslie Mah | Associate Advisor

Katherine Yang | Associate

Steven Bos | Administrative Assistant

Grace Wang Portfolio Management Practice of RBC Dominion Securities
Email: gracewangpractice@rbc.com

Phone: 604-257-2483
745 Thurlow Street, 20th Floor
Vancouver BC, V6E 0C5

gracewangpractice.com