The global stock market (shares in the great companies of the world) is one of the most powerful wealth-building machines ever built.

So powerful that a modern study found that from 1990 to 2020, global markets created around $76 trillion of wealth for shareholders in excess of what a cash investment would have earned.

However, this wealth generation did not come from the market as a whole. It came from a small corner of it.

Almost unbelievably, the team that studied the 64 000 listed companies across 43 countries found that over half the companies returned less than cash, and that all the net wealth created came from only 2.4% of the companies.

How Does The Average Investor Benefit?

This raises an obvious and uncomfortable question. If almost all the wealth comes from such a small group, how do you make sure your money is in it?

Logically, it seems there are two answers.

The first is to aim to pick the winners in advance. This is what most of the investment industry is built around, and it attracts some of the sharpest minds in finance. Highly intelligent people backed by research teams and sophisticated models spend their days trying to capture the 2%. But the results show that it’s almost an impossible task. The majority of professional fund managers underperform the market over long periods. Among the minority who outperform, skill is hard to separate from luck, making it difficult to identify winners in advance.

Owning The Haystack

If it’s difficult to identify the 2% in advance, what is the alternative?

Using a metaphor: rather than trying to find the needle in the haystack, buy the whole haystack.

A globally diversified fund holds every listed company of meaningful size. The future members of the 2% are already inside it, alongside the thousands that will never amount to much. You do not have to know which is which. You own the winners by default, for the simple reason that you own everything.

A fund like this has no opinion on whether any share is overpriced. It holds the big companies because they are big, and keeps holding them as they grow. A skilled investor might have sold Apple in 2010, convinced it had run too far. A fund like this could not, because it does not form views, and that is exactly what keeps you holding the winners through the years when selling would have felt clever.

Owning the haystack can be optimised even further using systematic evidence based strategies, a topic for another day.

Not a Free Ride

Owning the whole market is not a free ride. You own every downturn as well as every winner. A globally diversified fund rewards only investors who can remain patient and disciplined during inevitable market declines. We believe that an investor’s behaviour will ultimately determine their success.

As always, a good portfolio is only one piece of the puzzle. A good long-term plan and the patience to stay the course through difficult years matter at least as much as the funds you choose. Staying the course is where most of the difference is made.

Are you, or your fund manager, trying to identify in advance which companies will end up in the 2%? Or do you simply own all of them?

We Can Have Your Back

Owning the 2% is the easier part. Building the plan around it and having someone in your corner when markets get difficult is where we have really helped clients.

Compliance disclaimers:

“The value of investments and any income from them can fall as well as rise. You may not get back the full amount invested. Past performance should be used as a guide only and is not a guarantee of future performance.”

“Different investors will view these trade-offs differently depending on their objectives, time horizon, and attitude to risk. If you would like to discuss how this relates to your own circumstances, please speak to us".”

With best wishes, Gary

Gary Smithson - Partner, Farringdon Asset Management Singapore and Malaysia

​gary-smithson-farringdon.kit.com​

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