There is an old saying that diversification is the only free lunch in investing.
Most investors understand the concept intuitively. By owning many businesses across many industries, the fortunes of any single company become less important.
Success Creates Concentration
The S&P 500 is not an equally weighted collection of 500 companies.
Instead, companies with larger market values receive larger weights in the index. The larger a company becomes, the larger its representation within the benchmark. Over long periods of time, this methodology has worked remarkably well. Successful businesses receive larger allocations while struggling businesses naturally become less influential.
The challenge is that success can eventually create concentration.
As a small number of companies become extraordinarily large, they begin to exert an outsized influence over index performance. Investors may technically own hundreds of stocks, but their returns increasingly depend on a relatively small group of market leaders.
At some point, investors should ask a simple question:
Am I diversified by the number of companies I own, or am I diversified by the sources of my returns?
Those are not necessarily the same thing.
Today, the ten largest companies in the S&P 500 account for roughly 37% of the entire index (State Street). By comparison, the top ten represented only 23% of the index at the end of 2019 and 25% of the index as Chat GPT was launched in 2022 (Chart Row). Additionally, the technology sector of the S&P 500 is now nearly 40% of the index. Despite there being 11 sectors, one of them is nearly half the weight of the index!
Within our Dividend Strategies, we have proactively planned to account for these risks by maintaining rules for concentration by sector and individual position size, ensuring that we always maintain a diversified portfolio.
Investors have seen versions of this movie before. In the early 1970s, a select group of growth companies became known as the Nifty Fifty. According to Capital Group, the top 10 Stocks in the market back in the 1970’s were 39% of the index, not too far from the concentration levels today.
In the late 1990s, technology companies captured the imagination of investors in a similar fashion. The internet ultimately changed the world. The mistake was not recognizing the innovation. The mistake was assuming that innovation alone guaranteed attractive investment outcomes.
Sometimes, when markets fall in love with the leaders, the problem is not the quality of the businesses, but rather the expectations embedded in their stock prices. When expectations become high enough, even great companies can disappoint investors.
Opportunity Often Hides in the Shadows
One consequence of market concentration is that investor attention tends to narrow.
As capital flows into a small number of market leaders, less attention is paid to the thousands of businesses operating outside the spotlight.
Meanwhile, many of those businesses continue to execute.
They build factories, they produce industrial gases, they maintain electrical grids, they manage and develop commercial real estate, they construct naval vessels and national defense systems, and most importantly they continue generating cash flow and returning a portion of that cash flow to shareholders.
The stock market frequently behaves as though the economy revolves around whichever companies dominate financial headlines. The real economy is considerably broader.
As we’ve discussed in prior letters, physical infrastructure still matters. The digital economy ultimately depends on tangible assets: power generation, industrial production, transportation networks, and the businesses that make modern commerce possible.
The economy may be becoming more digital, but it hasn’t changed the nature of evaluating investments. We undoubtedly care about the growth prospects of a business, and many of our favorite businesses are a part of the areas of the market that have seen frenzied attention like Artificial Intelligence, but in each case our process remains the same.
Rather than following the winds of the day we focus on identifying businesses rather than narratives: strong balance sheets, durable competitive advantages, disciplined capital allocation, and growing dividends. It is to that end that we work.
November 2026
