“Let your winners run” is one of the oldest adages in investing. One of the newest ideas is that the winners may be running away with everything.
Modern capitalism is built on the idea that as companies get big, they become fat and happy, opening themselves up to lean and hungry competitors who can underprice and overtake them. That cycle of creative destruction may be changing in ways that help explain the seemingly unstoppable rise of the stock market.
New research by economists Gustavo Grullon of Rice University, Yelena Larkin of York University and Roni Michaely of Cornell University argues that U.S. companies are moving toward a winner-take-all system in which giants get stronger, not weaker, as they grow.
That’s the latest among several recent studies by economists working independently, all arriving at similar findings: A few “superstar firms” have grown to dominate their industries, crowding out competitors and controlling markets to a degree not seen in many decades.
Let’s look beyond such obvious winner-take-all examples as Apple or Alphabet, the parent of Google.
This agrees with earlier posts in which I recommend Amazon, Google, Facebook, and MasterCard stock, all which have market dominance, strong growth, are high-IQ, and have trounced the S&P 500 index over the past decade or longer (with the exception of Facebook, which only went public in 2012). Post-2008 capitalism (but also society) is increasingly winner-take-all, with large and successful firms (but also high-IQ neighborhoods such as Palo Alto and Menlo Park) becoming richer and bigger, as everything else kinda stagnates.
The article offers the following explanation:
Why might it be easier now for winners to take all? Prof. Michaely suggests two theories. Declining enforcement of antitrust rules has led to bigger mergers, less competition and higher profits. The other is technology. “If you want to compete with Google or Amazon,” he says, “you’ll have to invest not just billions, but tens of billions of dollars.”
These explanations seem inadequate. The AOL Time Warner merger was considered a failure and cost shareholders a lot of money. This occurs because parent companies overpay, so bigger is not always better. Established companies can indeed fail or falter when newer and better ones take over (Myspace vs. Facebook; Research in Motion vs. Apple, Google vs. Yahoo, etc.), indicating that the free market system works when it’s allowed to, akin to evolution where better-adapted organisms replace poorly adapted ones. So what could be hindering it? My guess is the difficultly of establishing competing firms, due to high costs. Venture capital has become too scarce and risk-averse (due to the 2008 crisis), and costs such has advertising, rent, labor, insurance, etc. that are required to start a business have all exceeded inflation.
Also, contrary to the ‘tens of billions of dollars’ figure cited by the article in reference to Amazon, in the technology industry, disrupting an existing business can be done for far less. Yahoo was worth $100 billion at the peak of the bubble in 2000, but Google, started 1998 in a garage with $1 million in funding, was able to beat it. In 2006, Myspace was worth billions and owned by Fox News, but Facebook, launched in a Harvard dorm room in 2004, won in the end. But this hasn’t happened yet to Amazon, because the alternatives either don’t exist, aren’t as good, or haven’t been able to unseat the market dominance that Google, Facebook, and Amazon already have, or such alternatives simply cannot get the funding, due to scarcity of venture capital.
Overall, both middle income workers and small businesses are being strained, the latter unable to keep up and take advantage of the cheap borrowing and economies of scale that large firms benefit from; the former on the losing end of the tireless push for more productivity and efficiency, where for many jobs the supply of labor vastly exceeds demand.
With wealth creation the ‘new America religion‘ (which is both kinda cruel and ironic given how hard it has become for the typical American to create wealth, unless you’re in the technology industry, get lucky, or have a lot of money invest in the stock market and or real estate), it’s not surprising many feel left out.
Related: The Post-2008 Economic Reality