What I Learned This Week

The concentration of economic power has led to spectacular investment returns. As contrarians, we always ask when will it end and how will it end?

One link that has not received as much attention as it should is the relationship between consolidation and passive investing. The winner-take-all cycle has turned for two decades: Digital natives and sector leaders leverage expertise and spending power to maximize digital efficiencies. They suck in profits from smaller, less nimble old-economy companies. The stocks of the digital natives and sector leaders soar, accounting for the vast majority of growth in the indexes they populate. Inflows to those indexes spike. Active managers have no choice but to capitulate—if they don’t own the digital natives and sector leaders, they will underperform to the point of extinction. More money flows to…

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