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Michael Mauboussin: Top 2% of Listed Companies account for 90% of Wealth creation.

In his latest article, Michael Mauboussin examines the demographics of public companies in the U.S., including how many are born, how long they live, why they die, and the returns they deliver to shareholders. This is highly relevant for investors as they approach valuation and portfolio construction. The skewness of outcomes is particularly striking.

Here are the key takeaways:

  • The number of public companies in the U.S. has declined significantly since peaking in 1996, with fewer new listings than delistings over that period. Academics estimate there is a “listing gap” of 5,800 to 12,200 companies between how many are currently listed versus how many should be listed.
  • About half of all public companies delist within 10 years of listing. The most common reasons for delisting are mergers and acquisitions (58% of delistings since 1976) and failure/cause (39%). Corporate longevity follows an exponential decay pattern.
  • A small percentage of companies account for most of the wealth creation in the stock market. From 1926-2022, just under 60% of companies destroyed $9.1 trillion in value while slightly over 40% created $64.2 trillion. The top 2% alone created over 90% of the net wealth.
  • These skewed outcomes have implications for valuation, suggesting investors should consider a range of possible end states rather than simple extrapolation. For portfolio construction, the results support either broad diversification to capture the skewness or concentrated portfolios that seek to own the wealth creators and avoid the destroyers.
  • The composition of the U.S. stock market has changed significantly, with mega-cap companies now representing a much larger share than in the past as the number of micro-caps has dwindled. This impacts key market characteristics investors should consider.

The skewness in corporate wealth creation suggests two potential investment approaches. The first is to seek broad diversification in an index fund. If the future is similar to the past, the outperformance of the wealth creators will more than make up for the underperformance of the losers. The second is to build a portfolio that seeks to avoid the wealth destroyers while owning the wealth creators.

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Disclaimer of liability

The above has been prepared by Børsgade ApS for information purposes and cannot be regarded as a solicitation or recommendation to buy or sell any security. Nor can the information etc. be regarded as recommendations or advice of a legal, accounting or tax nature. Børsgade cannot be held liable for losses caused by customers’/users’ actions – or lack thereof – based on the information in the above. We have made every effort to ensure that the information in the above is complete and accurate, but cannot guarantee this and accept no liability for errors or omissions.

Readers are advised that investing may involve a risk of loss that cannot be determined in advance, and that past performance and price development cannot be used as a reliable indicator of future performance and price development. For further information please contact info@borsgade.dk

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