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.