The “fat tail” where a small number of companies create most of the wealth and the meaning that technological innovation brings

Stock market returns are dominated by a handful of very good stocks. The same is expected for crypto assets.

From 1926 to 2016, just five of the 253,000 publicly traded companies covered 10% of the $35 trillion in wealth creation in the U.S. stock market. The five companies are ExxonMobil, General Electric (GE), IBM, Microsoft, and Apple. And the stocks of 90 companies cover more than half. Just under 1100 produced all positive returns. The rest, combined, yielded smaller returns than U.S. Treasuries.

Why is it so biased?

Few companies create most of the wealth

Stock returns are not normally distributed. It’s heavily skewed to the right, with a handful of very good names forming what’s called a “fat tail.” Long-term investors who didn’t own these stocks risked missing out on the market’s average returns.

fat tail: One of the distributions showing extreme fluctuations that cannot be shown by the normal distribution. The frequency of returns that show large fluctuations increases, and the base of the return frequency distribution becomes thicker, hence the name “fat tail.” (Source: Nomura Securities)

A similar bias is expected for crypto assets. Bitcoin (BTC) is a great example of creating wealth. We compared returns over the past five years to the monthly market capitalization weighted average of the top 10, 50 and 100 crypto assets (excluding stablecoins and wrapped tokens).

None of them outperformed Bitcoin. The top 50 and 100 crypto assets were negative.

Why? What causes bias in the first place?

I think the root cause is technological innovation.

Meaning of technological innovation

In Technological Revolutions and Financial Capital, by Carlota Perez, technological innovation is “a powerful and highly defined set of new and dynamic technologies, products, and industries that bring about profound change across the economy.” defined as a cluster.

Peritz defines five technological innovations since the late 18th century:

These five eras began with disruptive innovations that attracted talent and risk capital, leading to an explosion of startups. Financial bubbles, corruption and bankruptcies generally followed, bringing regulation, management principles and productivity. This is the so-called golden age of growth and profitability.

Since the Steel Age, the Golden Age has been dominated by big business. The longer the golden age lasts, the greater the chances of the winners (= the blue chip stocks) making their wealth huge.

Each of the five companies that have covered 10% of wealth creation since 1926 is a market leader in the post-steel era of innovation.

Notably, five companies were founded early in their respective revolutionary eras, maximizing their chances of compounding returns over the long term. But just being there at the right time isn’t enough. These winning companies imagined a future that others could not.

Who will lead the new era?

We are now about 50 years into the information age. A new era is likely to emerge. Will it be the age of crypto assets?

We believe that crypto assets alone are not enough to innovate. But crypto-assets are a powerful innovation that could well be combined with other innovations such as artificial intelligence (AI), robotics and genomics to create a new era.

If our predictions are correct, the winners of this new era will be among the current new entrants. Long-term investors can benefit from having wealth creators in their portfolios that will drive market returns for decades to come. Crypto assets should be a strong contender.

Mr. Jennifer Murphy: Founder and CEO of Runa Digital Assets. He has over 30 years of experience in asset management, with the last five years focusing on the huge potential of blockchain and crypto assets.

|Translation and editing: Akiko Yamaguchi, Takayuki Masuda

|Image: Shutterstock

|Original: What Fat Tails and Revolutionary Ages Mean for Digital Assets