Episode 390: The "AI Bubble" and Stock Market Concentration

25:36Those are wild numbers. Crazy numbers. And then we also know that US stock market concentration, which was already high, has shot up even further in the last months even, in the last year for sure. As I alluded to earlier, stock market concentration and high stock evaluations are different issues, but they can be related by the fact that a rapid rise in valuations for a small number of firms is kind of what can lead to market concentration. So you had a period of really high returns for a subset of firms that leads to high valuations and market concentration. Now, I've already danced around this a bit, but I want to be completely clear that we are not taking a position on whether we are currently witnessing a bubble in the US stock market.

26:18That's been discussed a lot. There've been lots of media articles about whether or not we are in the US market is in a bubble. But I do think it's useful to look at past instances of high market valuations and market concentration to understand the potential implications of what we're seeing in the US market now and the lessons that we might be able to take from past experiences. Any comments from you guys before I keep going? It's an important point to highlight that we're not predicting anything because people hearing this discussion is like, well, if this is a possibility, what should we do to prepare for this possible recession or negative outcome?

26:56And it comes back to diversification and discipline to a plan. If you knew with certainty what was going to happen, then it'd be obvious. that comes back to the crystal ball debate. Like if you have a crystal ball, no one would be in our profession. You would just be picking the right stocks every single time and everybody would be millionaires or billionaires, but that's not a reality. You have to make decisions based on what you know at the time. And at any given time, there's so much uncertainty and unknown facts as to what's going to happen in the coming weeks, months, years ahead. Did you read ahead in my notes, Ben?

27:31Because I'm pretty sure my last sentence is the main lessons are diversification and discipline. I did not read. I had announced stealing the thunder again. Okay. So the Canadian example that I alluded to earlier that Dan forced me to disclose was Nortel. Spoiler alert. Right. That was even crazier than what we're seeing in the US market. So Northern Electric and Manufacturing Company was spun off from Bell Canada in 1895. It's an old company. And in 1998, it was renamed Nortel Networks. And then during the dot-com bubble, Nortel's early work that they had previously done in optical networking technologies propelled it to the forefront of the internet infrastructure revolution.

28:09It was making like really useful stuff that the world needed at the time to build out the internet. Actually really interesting. So Nortel, as we talked about earlier, is gone now. But my understanding is that when that happened, its patent portfolio was extremely valuable and was sold off to a bunch of the tech companies that are now killing it today. So it's not like Nortel was vapor. It was a real company with real valuable assets and knowledge. It's at the forefront of what's happening with the internet. Its stock price goes crazy, creating huge amounts of wealth for investors and the many employees who received stock-based compensation and the pension plan of Nortel, which in hindsight probably shouldn't have had Nortel stock in it.

28:53It peaked, like I mentioned earlier, it peaks at over 36 % of the Canadian stock market index, which at the time was called the TSE 300. Nortel and the Canadian market had these ridiculously high valuations in August of 2000, which is where the peak was. If you look at the peak of the Canadian market next to the peak of the US market, Canada is way higher. It peaked at a Shiller cyclically adjusted price earnings ratio of 60.62, much higher than the US's peak. What's a more long-term average, just something like 15 or 16 or something like that. Maybe a little higher now. I'd have to look at the data.

29:31It'd be a much, much lower than 60. It was never before seen, never seen since in Canada, at least. US valuations now are below, but nearing their 1999 peaks. But yeah, Canada has never come even close to where it was then. Just for listeners who are not aware, the Shiller cyclically adjusted price earnings ratio measures market prices against the index is 10-year average real earnings. So the assumption is basically that long-term earnings growth tends to be pretty steady, which it does tend to be. And if that's true, a high shiller price earnings means that investors are paying a lot more for expected future earnings and should therefore expect lower returns in the future unless earnings end up being unusually high in the future, which can happen.

30:18And that has happened in the US market. It's a noisy but useful predictor of, hey, evaluations are high, that means expected future returns are low. And we do have some interesting data to talk about with respect to that in a bit. So Nortel, like many companies in these technological revolution periods, already had good technology. It was making useful products, but all of a sudden it's got a ton of cash and they start making internet-related acquisitions, just buying all kinds of companies. And there's some crazy stories about people who worked at Nortel at the time going to visit the acquisitions, like the companies that had been acquired.

30:57And I read this one interview where somebody gets to the company and there's like a rope in the back of their office or whatever that had nothing in the middle of it. And they're like, this is the product. And the person from Nortel is like, what do you mean this is the product? And the person from the acquisition is like, well, you guys bought an idea. There's no product here. So I guess Nortel made a bunch of these unprofitable acquisitions, made all these investments that did not pan out. So they started having some problems and then the dot-com bubble pops, which obviously accelerates what probably would have been a decline anyway due to their acquisition strategy.

31:31So Nortel goes bust, big time, bankruptcy type bust. Because it made up 36 % of the market at its peak, the result for the stock market was rough. The TSE 300 dropped by 43 % between September 2000 and September 2002. That sucks, 43%. I think there are two interesting lessons that are worth highlighting. One is that the drop was for sure painful, 43 % over a couple of years, but the market recovered in Canada by July 2005, back to its pre-crash levels. It went on after that to deliver really strong returns, even while the US market, as we'll talk about in some detail in a second here, struggled for more than a decade.

32:12Despite having been more concentrated, the Canadian market was actually more resilient in this case, which is just an interesting little anecdote. If you look back from what we know now, the Nortel crash was really just a short blip and a long track record of pretty good performance. Canada has been one of the best performing stock markets around the world historically. Not quite as good as the US at this point in time. But if you looked at, I believe in 2009 or 10, maybe even 11 and 12, if you went back to 1900, Canada and the US had very, very similar stock returns. Just in recent history, the US has taken off.

32:50So one lesson is, yeah, that was painful, but the Canadian market, despite its concentration, was able to recover in pretty short order. And then the other lesson that I think is pretty interesting is that while the Canadian market as a whole was hurt pretty badly by its exposure to Nortel, Canadian value stocks, if you take an index of Canadian value stocks, so that's stocks with low prices relative to their fundamentals, they did not crash when the overall market did. And then they went on to deliver even stronger returns than the Canadian market over the subsequent period. That also comes up in the US example that I will talk through next.

33:22So the US market, it got more concentrated around the year 2000, but it wasn't not as extreme as Canada or as the US market is now in 1999. But it did have really high stock prices, which were in hindsight, as we talked about earlier, mostly unjustified by fundamentals. Some of the companies like Microsoft and Amazon and a few others came through the other side and proved that, hey, there was real transformational potential with the internet, but the vast majority of companies that tried to capitalize on it did fail, which led to really poor stock returns. That's the famous dot-com bubble and less famous, but a little bit famous, lost decade for US stocks.

34:01The lost decade is the US market crashed from around March of 2000, measured in US dollar terms. It took about a decade to recover in US dollar terms, measured in Canadian dollar terms, because the US dollar was not so hot over this period. It took until July of 2013 for the US market to recover. Again, that's measured in Canadian dollar terms. Another brutal period of technology-induced high prices, leading to low realized stock returns for investors who bought at the peak. Unlike the Canadian case, the recovery here was not so swift. The last decade, I don't think it's as common as we think in our circles.

34:39I've heard lots of people when they bring up, well, why don't I just invest in this S &P 500? There's a ton of recency bias, And that recency bias is like 10 year period because people don't realize when you bring up, there was a 10 year period in the early 2000s where the US stock market underperformed the rest of the world. And people are shocked because of where we are today. It's just a lack of knowledge or insight into what has actually happened in historical valuations. Yeah, memories are pretty short. Ben, I think we've talked about this on the pod before. When I started my blog in 2010, I actually wrote a piece pretty early on trying to encourage people not just to invest in Canadian stocks.

35:25because at the time, there was a huge number of Canadian investors who just felt, I'm just going to invest 100 % in Canadian stocks. They obviously crushed the US over the last decade. And why would anybody invest in this has-been economy that we call the US? I mean, I wish I could find it today because, no, I should be clear, we were encouraging people not to do that, that they should invest globally just like we're doing now. But it is remarkable because I'm sure some of those same people are the ones who are 100 % US equities today. We all love a winner. And we all have, maybe our memories are 10 years.

36:07Anything earlier than that, we've just forgotten about, I think. I would love to see that blog post. I would also love to see the comments on that blog post. People telling me I was crazy. I'll have to dig into the archives for it. The Wayback Machine. Oh, that'd be a cool one to find. The range of investor behavior is always interesting in these cases. Because just like you're saying, Dan, there's a lot of people that want to double down on US equity because it's going so well. And then there's others on the opposite end, like this is too scary. I want to get away from US equity. It's often the extremes, not, well, let's keep some, let's get away and reduce this strong overweight or let's increase it to capitalize on the returns.

36:47Balanced opinions are boring. Like people aren't interested in reading your opinion that you should take a balanced approach and yes, invest in the market, but diversify into other markets as well. It's not a message that has great resonance as opposed to buy, buy, buy or sell, sell, sell. It's also exciting to win. People like there's got to be an easy way to do this. Why don't we take advantage of ones that have done well? And then my portfolio will be that much better. Not that obvious. And the US market's been crushing, but like I'm going to talk about the Japan example later, Japan absolutely crushed for decades before it didn't.

37:25I wasn't around to know for sure, but it probably looked like it made a lot of sense to invest in Japanese stocks after 20 years of their just ridiculous outperformance relative to everything else. Well, there's another argument right there for global diversification. And you cover three decades, right? I mean, in the 80s, it was Japan and therefore like non-North American stocks. And then in the 90s, it was the US. And And then in the first decade of the 2000s, it was Canada. Now it's been the US for the last 15 years or so. It has had a longer history, but clearly markets have their day in the sun.

37:58If you hold all of them all the time and rebalance, yeah, you're never going to shoot the lights out and had the single big winner, but neither are you going to take it on the chin and be over-concentrated in the big loser. It's a simple message. It is simple, but not always easy to get across or to stick with. Some are my notes later. So I'm probably going to say this again as I go through what I have written down, but diversification means that you always hold the winners and the losers. Somebody said to me one time that if you love everything in your portfolio, you're not diversified enough.

38:30And it's true because a properly diversified portfolio is going to have you looking at it and going, wow, that did well. Jeez, this one really was disappointing. If you're looking at everything and everything's going up, yeah, you're probably not very well diversified. And pretty soon it's all going to go down too. The last decade for the US market, it was partially related to the, I just want to be fair here, partially related to the dot-com internet bubble. But it was also hit with the great financial crisis. So like when stocks were close to recovering, they got, or maybe they even briefly recovered, they got smacked by the GFC, which was a separate issue.

39:08I think it was separate. Maybe someone is going to say, well, actually they're connected in this way. I think they were separate, at least from the perspective of technology bubbles. You know what, actually? I have seen arguments that the GFC was its own financial technology bubble. You could say they're related. Anyway, you get this last decade in US stocks, which was obviously painful for US investors and especially US only investors, and even more so for US investors focused on large cap growth stocks or technology stocks. They got hit harder, didn't recover as quickly than the US market as a whole.

39:39Now, similar to the Canadian example that I brought up earlier, an investor in US value stocks and to an even greater extent, small cap value stocks actually fared much better over this long period of stock market level poor performance. Value and small cap value had positive returns while the market was flat over this period. You paid for that before and you've paid for it since. US value stocks did poorly relative to growth stocks leading up to 1999. And in recent history, they've gotten absolutely obliterated. It's not like I'm not just saying value stocks, yay, they suck sometimes. But when the stock market sucks, value stocks have often sucked less.

40:15But it's not like this is a silver bullet to fix everything. And then the other interesting thing, and I mentioned this when I was talking about the Canada example, is that throughout this period of US stock market struggles, the Canadian market actually performed quite well. And so it just kind of leads, which you guys have already said a couple of times, stealing my thunder before I got here, is that diversification is known as the only free luncheon investing for good reason. We cannot predict which countries or companies will contribute to future returns. And it follows that being overly concentrated in any one company or country leads to unnecessary risk that can be easily diversified away.

40:51The main, as we just talked about, the main problem with diversification is behavioral. It inherently means you always own the stuff that's performing well and the stuff that's performing poorly. Okay. So those two examples, Canada and the US, just little anecdotal fun stories to talk through. They had high market valuations in common, but the Canadian market in the 1999 example became much more concentrated than the US market. In the past, the US market has reached high concentration levels, not quite as high as today, but high, close, without going on to deliver poor future returns. So it's like The valuation thing seems to matter.

41:27And I know that was just anecdotal. I've got more data in a second here. The concentration thing is not as obvious. And I think a point that often gets lost in discussions about the US markets concentration is that many other markets around the world are far more concentrated and have been far more concentrated than the US market. And yet they still managed to deliver positive returns in some cases, even more so than the US market. If we look back at the last 10 years of returns, as an example, I have data available to me to look at this. I don't have data going further back, at least not at my fingertips.

42:00The weight of the top seven stocks in the 10 largest stock markets, excluding the US, was 40.94 % on average as of November, 2015. 10 largest stock markets, excluding the US, the weight of the top seven stocks was 40.94 % of the market capitalization of the total market as of November, 2015. Switzerland was the most concentrated market at 60.11 % in the top seven stocks. Japan was the least concentrated at 16.91%. Market concentration, not a new thing. The return from November 1st, 2015 to November 26th, 2025 measured in US dollars was 8.44 % on average. That's just an equal weighted average of those 10 markets.

42:48So that return trails the US market return. I mean, everyone knows, as we've mentioned, that the US market has outperformed international markets in recent history. But 8.44 % that's measured in USD, still a meaningfully positive equity risk premium over that period. Taiwan, which was one of the most concentrated markets in November 2015, actually outperforms the US market over that following 10-year period. There's a chart that we'll put in the video for this, but the overall relationship between market concentration and future returns across countries seems to be noisy, like at best noisy. I don't think there's a whole lot of relationship going on there.

43:26The other thing I looked at, so I looked across those 10 non-US markets where I only had 10 years of data. And in the US market where I have more data, I looked at the same relationship over time, going back to my data set starts in 1926, but I think I had to start measuring as of 1927. So I sorted 10-year future returns on the starting level of market concentration in the top seven stocks. And I just look at, is there a relationship between 10-year future returns and current market concentration? There's a very slight negative correlation between market concentration and future returns, but it's not statistically significant.

44:06So there's a good chance it's just noise in the data, but even statistical significance aside, it's a pretty weak economic relationship. Is there any evidence though that the concentration leads to higher risk that is not compensated? I mean, if I'm just thinking on a micro level, right, if an individual holds only seven stocks in their portfolio, it's not well diversified over any 10, 15 year period. It could easily outperform the broad market, but only with correspondingly much higher risk. And in terms of risk adjusted returns, how does the concentration affect that? I don't know if you know that or have that data, but.

44:47I have annual data, so it's hard to measure things like volatility over time with cutting the data up using concentration and then seeing if it was more or less volatile. I just don't have high enough frequency data to do that well. I did read an interview with Owen Lamont, who's a fairly well-known economist. And he actually talked about some of these same examples over a similar data set over a similar time period. And he said in his analysis, he does not see any differences in risk over time. So I have not replicated that, but his comments, like he's credible economist. I think his comments are worth mentioning there.

45:22A really interesting perspective, and this actually also comes from that interview, I'm pretty sure, with Owen Lamont, is that he talks about AT &T. AT &T was the largest stock in the US market in 1982. Not in 1982, but in prior decades, AT &T was a larger portion of the US market than NVIDIA is today. It's a massive, massive company. His commentary is that, was the US market less risky after AT &T was broken up in 1982? Of course not. It doesn't make a difference. Good way to look at it. Yeah. Everything's the same. These companies, if an individual company is large and well-diversified enough that it could be broken up into smaller components, how concentrated is the market really?

46:04His commentary is basically saying that he does not think market concentration is the issue. He thinks valuation is the issue, which is the same conclusion that I come to in my notes here. I read his thing after I came to that conclusion. So probably some confirmation bias there. I'm reading like, oh yeah, own Lamont smart. So anyway, I do like that AT &T perspective. One thing that does appear in the data, and this came from a paper that Michael Mobison, who we have had on this podcast, he did a paper on market concentration. He looks at the post-1950 sample. And he does show that returns, US returns, tend to be lower over periods where concentration is falling and returns tend to be higher over periods where concentration is increasing.

46:46That makes sense just when you think about the mechanism, the relationship between concentration and valuation. If concentration comes from rising valuations for a handful of firms, falling valuations for those same firms, which would decrease market concentration, would also lead to lagging returns. Even then, when you look at the chart from Michael Mobison, we're talking about less positive returns, not total disaster returns. So that relationship between market valuations and future returns is a lot stronger, at least economically. Statistically, it's questionable, but market valuations, much stronger relationship, both across markets and within the US market than market concentration.

47:26On valuation, I looked at the relationship between the starting CAPE ratio and the 10-year return for the 10 largest developed stock markets going back to 1982. So I looked at rolling 10-year periods of the one-month step. Now, I do want to say, I know there are problems with this data setup. Comparing CAPE across the cyclically adjusted price earnings ratio across countries probably needs, I don't know, some statistical intervention to do it well. And then the other big thing is that from a statistical perspective, using these overlapping 10-year samples, that's the rolling samples of a one-month step, each sample overlaps by 11 months.

48:05So they're not really independent observations. So any conclusions drawn from the data I'm about to talk about are statistically questionable. That aside, so people who are statisticians can fume away, but I'm still going to talk about what the data show. There is a clear monotonic relationship between the starting cyclically adjusted price earnings ratio and future returns. When the starting CAPE is higher, future returns are lower. It's almost a perfectly monotonic relationship where each bin of starting CAPE is associated with, increasing CAPE is associated with a lower realized future return.

48:40Now, again, this does not mean that the market must crash tomorrow or next week, but it might mean that it makes sense to moderate our expectations for future returns, in this case for the US market due to its currently elevated valuations. Okay. So now I want to mention the Japanese stock market. It had this crazy run up leading up to 1989 and 1990. It did eventually become the largest stock market in the world by market capitalization, surpassing even the US market for a period of time. It was viewed at the time as this unstoppable economic powerhouse that the American people feared the economic power of.

49:19So I've read and its stock market valuations reached levels. I'd have to go and look, but I don't know if other countries have seen the levels of valuations that Japan did at its peak. Now, I also want to reiterate, I am not saying the US is the next Japan, but I do think it's an important example to consider. At the end of 1989, the Japanese stock market did crash. And if you had invested at the peak, you have not recovered in real terms to this day. 36 years. It's a long time. Yeah, coming on 37. That's insane. Wild. There are two things that would have saved an investor in Japanese stocks in 1989.

49:58And it comes back to themes that we've mentioned throughout this episode. Diversification across markets, a globally diversified investor, even with 40 % of their portfolio in Japan, when Japan went on to crash, did just fine because the US took the torch of stock market dominance from Japan with a vengeance. US went on to absolutely crush, took away some of the pain from Japan falling. And then the other thing is, again, similar to themes I've already mentioned, despite Japan's stock market struggles, Japanese value and small cap value stocks have actually performed just fine over that period, which is, again, pretty crazy to observe and think about.

50:39I also want to say this does not mean I'm suggesting that we should be timing the market. Talked about this earlier. a huge mistake. We could have been having this conversation, at least parts of it in 2021, when US evaluations were not quite as high as today, but high. If we had told everyone to get out of US stocks, then we'd be looking pretty dumb today. All it means is that not expecting the same rocket ship type returns that the US market has been delivering to continue forever. We probably shouldn't have that expectation. One thing I often wonder, and I don't know if there's any data to support or dispute this.

51:16But in the most recent really bad market decline was 2008, 2009. Since then, the world continues to get closer and there's a lot more access to information. I wonder if the increased access to information would impact the duration and intensity of a market recession. And is there any data that you've seen to support or dispute it? Yeah. So there is a paper that looks at the increasing correlations across global stock markets over time. And so it's asking the question of have the benefits of diversification declined. And what they show is that the increase in correlations is driven mostly by increasingly correlated discount rate shocks.

52:01So there's two things that drive different changes in stock prices. One are discount rates, the rate at which investors are discounting expected future cash flows. That's discount rate. The other one is cashflow expectations. So if we have increasing discount rates, stock prices go down. If we have decreasing cashflow expectations, stock prices go down. Two different mechanisms that can affect stock prices. This paper finds that the discount rate shocks are what are driving market correlations, but a discount rate shock when prices go down due to rising discount rates, expected returns go up. It's a decline, but you're taking more compensated risk when that happens.

52:40The cashflow component has continued to be uncorrelated. So that means that in the long run, because markets will produce different cashflows over time, there is still a diversification benefit to holding international stocks. There's a paper from AQR from, I think it predates the paper I'm talking about, but it finds the same thing. Basically, even if there are high correlations in the long run, stock markets are going to perform differently, which is what matters for long-term investors. So there is something to what you're saying, Ben, but I think for short-term investors, if you care about correlations next week, if markets drop at the same time and you have to sell everything, that has definitely gotten worse.

53:20But the benefits of diversification for long-term investors, I think is still very, very strong. Super interesting. Yeah, it's a neat paper. We talked about it when we did our episode on the benefits of international diversification. So the US stock market, it currently has these two defining features that are causing some investors to worry, high stock valuations and high market concentration. Market concentration seems like it should be problematic. Like Dan, intuitively, as you brought up earlier, if more of your portfolio is in fewer stocks or a higher proportion of your portfolio is in fewer stocks, it seems intuitively like that should be a bad thing.

53:55But even though it's seemingly problematic because of the potential impact of a few large firms faltering and bringing the whole market down with them, it's not historically been as much of an issue as you might expect. And we talked about that anecdotally with the Canadian market recovering from an extreme period of market concentration during their dot-com bust more quickly than the less concentrated US market, which struggled for a longer period of time. And if we look more broadly at the 10 largest non-US stock markets for the last 10 years, the relationship between concentration and future returns is like, it's not really there.

54:27There's not enough data points to draw any statistical inferences there, but we'll put the chart up. There's no relationship, not an obvious one. And then looking at US returns from 1927 to 2024, there is a weak economic relationship between concentration and future returns, but it's not statistically significant. So that's market concentration. Stock market valuations are more impactful. High current valuations, while they're a noisy predictor, they do seem to be related to future returns. It's an economically strong relationship, but it doesn't, as I mentioned earlier, really hold up to statistical scrutiny because we don't have a ton of independent data samples to draw conclusions from.

55:06So when you do like a proper statistical test of that relationship with the proper adjustments for overlapping samples, there will be no statistical relationship. But economically, we can see, again, we'll put the chart in the video, there is this monotonic relationship using data from a whole bunch of different countries. So at the very least, we came up with a really interesting chart that somebody might say is statistically irrelevant. I think the main lessons, as Ben mentioned already, are diversification and discipline, which I think are related. A properly diversified investor should be comfortable sticking with their portfolio through good times and bad, knowing they will always hold the losers and the winners, and that the winners are going to have an edge in the long run.

55:49I think if you're in one market, if you're in Japan in 1989, being disciplined is probably hard over the next 37 years. But if you're globally diversified, yes, Japan does poorly, but the other holdings in your portfolio do well. And again, I'm not saying US is the next Japan, but I am saying that I think diversification makes sense, even if you don't believe that to be true. I think a comforting message that I often hear in client conversations is that the consistency in the benefits of indexing and taking a disciplined approach, like no matter what happens in the market, our position supported by data is that it's better to remain diversified and disciplined.

56:28Like anything that you do is more likely to make you worse off. You may get lucky once or twice, but over the long run, you're probably going to be worse off. It raises some interesting questions to me, like in terms of practically speaking, how you diversify the portfolio. The obvious one that we've talked about is investing in all regions. If you're a U.S. investor, I've often seen people say, go 50 % U.S., 50 % international. As a Canadian investor, most of us overweight the very small Canadian stock market. And there's some good reasons to do so that have nothing to do with patriotism. So we're holding Canadian, US, and international.

57:07But there's a couple other things in terms of index selection. One is, and somebody can correct me if I'm wrong, but I believe that Nortel in Canada was the reason why they created capped index funds. So the one that exists now, it's the iShares XIC, the S &P TSX capped composite index. It's basically a cap-weighted index of all countries, I'm sorry, all companies in Canada, but no individual company is allowed to represent more than 10%. Now, right now, no individual company does. And it's been a while, I think, since anybody approached it, but a Nortel can't happen again. If Nortel happened again today, we'd get capped at 10%, not 36%.

57:55And I often thought, I don't love to put a lot of rules on cap-weighted indexes. I don't hate that one. I really don't. Certainly you don't want to limit it too much, but to just say, you know what, we're going to keep 10 % as the maximum in a small country with a fairly small stock market, that isn't necessarily the worst rule. If we look at the Magnificent Seven in the US, so you said it was around 35, 36 % or something. So it's like an average of about 5 % each, although they're not going to all be the same. It's under 10. No individual company represents 10. 10 % out of a much larger index is maybe too high.

58:40But if somebody said to me, I want to create an index fund that caps any individual stock in the US at 4 % or something, I don't think that's the worst rule in the world. You can get a little bit of that. You touched on at the beginning when you said that if you looked at a total market index, the proportion of the Magnificent Seven is a little bit smaller than it is in the large cap only index. It doesn't make a massive difference, but it helps. And so this is just a way of getting exposure to all of these companies in a pretty big way where nobody's saying equal weight every stock in the index, but we're saying, yeah, maybe seven, eight, nine, 10 % is plenty.

59:22I want to see if I can pull up the underlying holdings of something like VEQT. Yeah, that's a good point. When you put it in a global portfolio, each individual company is not going to be that much. But of course, VEQT holds ETFs. So pulling up the underlying holdings is not as obvious. But even if you look like Vanguard's VT would probably be a good one. It's a little different. And VEQT is going to have much more Canadian focus, but each of those individual Magnificent 7 as a proportion of the global stock market, as opposed to as of the S &P 500, obviously going to be much, much lower. So the concentration has to be seen in that perspective, I think.

1:00:02I wish I could do VEQT easily. I'm going to pull up VT here though. But as you noted, Dan, it itself is like 64 % US. So if we did this for VEQT, the concentration would be even lower. But looking at the top seven holdings for VT, just under 19%, 18.9%. For all seven of them combined? Correct, yeah. So maybe half of what it is if you just held the US market. There are some simple ways, I think, of mitigating this concentration risk in a portfolio. It is interesting. I just read an article a little while ago where active managers were extolling their skills and saying things like, this is a classic Nortel era question or comment.

1:00:50These days, indexes are really risky because they're so highly concentrated in these stocks. An active manager, though, can come to your defense and reduce that concentration and analyze companies based on their fundamentals and all of the usual things. The joke of it is most of them not only will underperform, the joke of it is I think if you went back to Canadian mutual funds in the era of Nortel, most of them probably held huge holdings in Nortel. Despite what they said. And they might have been limited. they probably couldn't have put 36 % of their fund because mutual funds do have limits on concentration.

1:01:33If they were reducing their allocation to Nortel, it was probably because they had to, not because they had any insight into its overvaluation. There was an article by Michael Moveson on market concentration, and he speaks to those points, Dan. He looks at the proportion of active managers that outperform when concentration is rising. In the conclusion of that article, 30 % of US mutual funds outperform their benchmarks on average each year from 1960 to 2023 when concentration was rising and 47 % outperformed when concentration was falling. So it was true in his data that when concentration was falling, a higher proportion of active managers outperformed, but we're talking about going from 30 % to 47%, not to 90 % of active managers outperforming.

1:02:26So it's still pretty - Or even 50, right? Yeah, not even 50. Like it went from terrible to almost a coin flip. Congratulations. These are the small triumphs, I guess we have to cling to. That article does talk quite a bit about active management versus stock market concentration, because when markets are concentrating the large stocks that become the concentration problem are outperforming. And his data, and I don't know if this would hold in Canada as well to your Nortel point, but his data show that active managers tend to hold on average smaller companies, so lower average market cap than the market.

1:03:03And so he's just making the point that over periods where a handful of big stocks are getting more and more valuable, active managers will tend to do worse. But when that unwinds, or if that unwinds, it creates more opportunities for active managers. But to your point, the opportunity is that you get a little bit worse in a coin flip instead of much worse. And if you extend that over both periods, right, it's the classic sort of thing. We all know active managers tend to outperform during downturns because they can go to cash and indexes don't. And then they underperform during the recovery. And if you put those two together, they don't even out.

1:03:38It's net negative for the active manager. So, you know, I'm thinking it's probably the same thing. There's a lot of narratives we can spin about how we recognize these big companies were overvalued. But again, we only know that in hindsight. Yeah. After the fact, you can say, well, the fundamentals didn't make sense, but before the fact, you can't, you can't say that. Except for 12 years, it was the best performing sector, you know, and now I'm identifying it after the fact as a bubble. Yeah. So I hope that discussion helps. We want people to stay invested in a portfolio that makes sense for them.

1:04:11We don't want people getting out of the market, but we also don't want people over-investing in what has done well in recent history. So it's really, well, it's what we talked about earlier. Discipline, sticking to an investment strategy that you believe in, but then also diversification, which I think feeds into having an investment strategy that you can believe in. Indeed.

1:04:37Quick after show here. We have one review, a rare one star. Say the disclaimer here first. We have a review from Apple podcast to read under SEC regulations. We are required to disclose whether a review, which may be interpreted as a testimonial was left by a client, whether any direct or indirect compensation was paid for the review. As you'll see in a moment, This is not a review that we would pay for or whether there are any conflicts of interest related to the review. As reviewers are generally anonymous, including this one was a very comical name. We are unable to identify the reviewer if the reviewer is a client or disclose any such conflicts of interest.

1:05:13But we could probably safely assume this guy is not a client. I hope not. Well, they're also from the United States, so it's almost guaranteed to be not a client. Fair enough. Okay. So they say it hurts to write this review. another victim of private equity. I have been a listener of this podcast for at least five years, and it makes me sad to see what this podcast has become lately. Every episode just feels like a lot of fluff, sales pitch, and self-grandiosity with some tricked-in index circle jerking unfollowed. And that is written by Fartcoin Designer. So Fartcoin Designer, we are very sorry to see you go.

1:05:50We wish you all the best in your future fart coin designing. We did get a little bit of feedback in the community as well. It was actually interesting. So the episode with Phil Briggs, which it was a little bit self-congratulatory because we had Trevor and Brett who had joined the firm recently on at the beginning of the episode to talk about their decision to join us and why we all think PWL is awesome. And then we had Phil Briggs on talking about the great advice that he gave to a new client and how that sets PWL apart from our peers because Phil gave advice that none of our competitors gave, which ended up being the right advice we believe and the client believes.

1:06:36So, you know, there was definitely some self-congratulatory content there. Some of that's because we're just awesome. Like, sorry, We can tone it down a little bit. I understand. Also some good comments about the order with which we did that because we had our new team members on first, which was more self-congratulatory. And then we had Phil on talking about the awesome advice that he gave. And so one comment was, I believe from Picasso Sparks, the same person whose comments I read at the beginning of this episode was that if we had had Phil on first to show how awesome we are and then had new employees talking about how awesome we are, that would have been better.

1:07:14That was good feedback. It was interesting because there was one person who wrote and then deleted a comment about how much they didn't like that episode for those reasons. And then there were a ton of people that came to the defense and were like, what are you talking about? They're sharing incredible financial planning information and disclosing or showing, demonstrating how they walked through giving advice to a client in a very specific situation. how can you be mad about that it was interesting to see that there were a few people who were like guys chill out with the pwl promotion which is fair but i don't know man i like us we're also building a business but i do think it was great advice analysis by phil in that case like yes sure it was maybe patting ourselves on the back a little bit but it was great thoughtful analytical advice that compared two options for the client to help them make a decision that they had already decided the other route, but it actually ended up being better for them.

1:08:14It was not about the self-raise. It was really about the cool analysis. Yeah, I thought so. But it could have been the combination of the two segments back to back. Everyone's like, oh, geez, these guys really love themselves. So I don't know if that turned anyone off. I'm very sorry, but only a little bit. but very sorry. Any other comments from you guys? Well, I think that's good. Yeah, that was a good one. All right. Thanks for joining guys. And thanks everyone for listening.

1:08:43Portfolio management and brokerage services in Canada are offered exclusively by PWL Capital Inc., which is regulated by the Canadian Investment Regulatory Organization and is a member of the Canadian Investor Protection Fund. Investment advisory services in the United States of America are offered exclusively by OneDigital Investment Advisors LLC. OneDigital and PWL Capital are affiliated entities. However, each company has financial responsibility for only its own products and services. Nothing herein constitutes an offer or solicitation to buy or sell any security. This communication is distributed for informational purposes only.

1:09:17The information contained herein has been derived from sources believed to be accurate, but no guarantee as to its accuracy or completeness can be made. Furthermore, nothing herein should be construed as investment, tax, or legal advice, and or used to make any investment decisions. Different types of investments and investment strategies have varying degrees of risk and are not suitable for all investors. You should consult with a professional advisor to see how the information contained herein may apply to your individual circumstances. All market indices discussed are unmanaged, do not incur management fees, and cannot be invested indirectly.

1:09:49All investing involves risk of loss and nothing herein should be construed as a guarantee of any specific outcome or profit. Past performance is not indicative of or a guarantee of future results. All statements and opinions presented herein are those of the individual hosts and or guests, are current only as of this communication's original publication date, and are subject to change without notice. Neither One Digital nor PWL Capital has any obligation to provide revised statements and or opinions in the event of changed circumstances.