https://youtu.be/mZEYfyXJrGc?si=2XtfEHyBeiUWuK_y
Market returns vs individual stocks
Power laws apply to public company stocks as much as VC investments
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Majority of stocks underperform the market
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Outsized returns from few companies
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Same effect observed in international equities: few strong winners driving market returns (even more strongly than in the US)
Which companies with outsized returns?
Predictive power:
- younger firms
- firms with rapid asset growth and cash growth
- rapid income growth was the most predictive
Best strategy: diversification
- incredibly difficult to pick the few winners
- this confirms the need for diversification
- ”own the market” to capture outsized returns of a few winners
Geographic diversification as well
- US market had an incredibly good run
- remember to diversify also geographically
- consider dividend-paying global stock indices
Rebalancing
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much of what has been written is overly simplistic
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it’s the opposite of momentum, it’s a contrarian strategy
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still very positive, restores diversification
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when diversifying, the best approach is to consider fundamentals instead of fixed % of portfolio