Every investor is guided by a foundational principle: that a broadly diversified portfolio is the best way to build wealth. It is the conventional wisdom, the first commandment of finance. Diversification is also the path to mediocrity.
The truth is, the very thing designed to protect you—diversification—is actually the largest barrier to achieving outsized wealth.
The empirical truth of the stock market tells a dramatic story. A landmark study by Bessembinder revealed the market’s deepest secret: nearly 97% of stocks underperform simple Treasury bills after costs. Digging deeper, shares of half of all publicly traded companies fail to create any wealth at all.
This means the entire, massive, multi-trillion dollar stock market is a vast ocean of mediocrity, driven by a tiny, precious 3% handful of outlier winners.
The reality is the investment industry has successfully weaponized behavioral biases. Fear of loss and the stress of volatility shove billions of dollars toward the comfort of broad, managed diversification. This is why the Exchange Traded Fund market in the United States alone is valued at over $11.5 trillion.
Diversification is a brilliant defense against catastrophic loss, but it’s the surest path to average performance, or worse. By casting a wide net, you dilute your exposure to the few, rare titans that are generating virtually all the gains. You own the entire desert, not the oasis of winners.
Achieving truly superior gains requires a willingness to defy this comfortable norm. It demands the conviction to search for and aggressively own shares of that 3% subset: the companies winning the most important secular trends of our time.
Consider the birth of cloud computing. When Amazon Web Services publicly launched in 2006, it was the start of a multi-decade, global trend. Our strategy at Markman Capital has been unwavering and highly successful because we recognized this. Nearly two decades later, AWS is stronger than ever, a compounding engine that exemplifies the kind of winning stock Bessembinder identified.
The path to outperformance requires discipline and selectivity. It means overcoming the fear that the financial services ecosystem sells. To beat the market, you must be willing to take calculated, concentrated risks and, most critically, have the fortitude to hold those winners through inevitable downturns.
True wealth growth is not a passive activity; it is a disciplined act of selection and conviction. The key is recognizing that while 97% of the market is noise, the only thing that matters is owning the 3% that drives the signal.
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