January 1, 2026

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

January 1, 2026

In this first episode of 2026, we sit down for a deep dive into one of the hottest concerns coming from clients and listeners lately: Is the U.S. stock market dangerously concentrated—and are we in an AI bubble? Ben, Dan, and Ben unpack the data, the history, and the psychology behind today’s valuations, drawing lessons from past episodes of market euphoria such as Nortel in Canada, the dot-com boom, and Japan’s 1989 peak. They explain why high market valuations—not concentration—pose the bigger challenge, how bubbles historically fuel real economic innovation while hurting investors, and why diversification continues to offer the only reliable protection against unknowable futures. Along the way, they revisit examples of how value stocks, small-cap value, and global diversification have fared across different market regimes.

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Key Points From This Episode:

(0:00:40) What RR is about: evidence-based insights, synthesis episodes, expert interviews, and long-form inquiry — not debates.

(0:04:20) Why listeners value RR: transparency, friendly inquiry, returning to topics over time, and the hosts’ dynamic.

(0:09:25) Rising concern: clients asking whether U.S. market concentration and an AI bubble mean it’s time to exit stocks.

(0:11:10) Advisors echo similar worries: U.S. politics, all-time highs, and emotional decision-making.

(0:14:20) Today’s data point: Top seven U.S. stocks = 36% of S&P 500; 32% of the total U.S. market — highest on record.

(0:16:10) Why people fear concentration: a decline in the Magnificent Seven could meaningfully drag down the index.

(0:17:30) Canada’s cautionary tale: Nortel once hit 36% of the TSX — collapsed to zero — but the market recovered by 2005.

(0:21:20) Bubbles through history: canals, railways, fiber optics, dot-coms — innovation funded by speculation.

(0:25:30) Dot-com parallels: huge ideas, low cost of capital, lots of failures — but lasting infrastructure remained.

(0:28:40) AI dominance: Since ChatGPT, AI-linked companies drove 75% of S&P returns, 80% of earnings growth, 90% of capex.

(0:31:15) Reminder: No bubble calls — just context. High prices don’t equal an inevitable crash.

(0:33:10) Concentration vs. valuation: concentration shows weak links to future returns; valuations matter far more.

(0:35:05) Market timing trap: U.S. valuations were high in 2021 — selling then would have been disastrous.

(0:36:40) The U.S. lost decade: 2000–2010 returns were flat; in CAD, recovery didn’t happen until 2014.

(0:38:55) Value stocks held up: U.S. value and small-cap value delivered positive returns while broad indexes stagnated.

(0:41:00) Recency bias reminder: Canadians once avoided U.S. stocks entirely after a decade of underperformance.

(0:44:05) Japan 1989: World’s largest market crashes — still not recovered in real terms 36 years later.

(0:47:10) Global diversification wins: A 40% Japan-weighted global portfolio still performed fine thanks to U.S. growth.

(0:49:00) Cross-country data: Many markets are far more concentrated than the U.S. — still delivered solid returns.

(0:52:30) Valuation evidence: Higher CAPE = lower future returns — economically strong pattern across countries.

(0:55:40) Core lesson: Diversification + discipline. You will always hold winners and losers — that’s the point.

(0:57:55) Practical ways to lower concentration risk: global equity funds, small caps, and Canada’s 10% cap rule.

(1:00:30) Why active managers don’t help: only ~30–47% outperform depending on concentration trend.

(1:03:25) Final takeaway: high valuations may imply lower returns, but prediction is impossible — stay diversified.

(1:05:15) After-show review: Addressing a one-star critique (“Fartcoin Designer”) with humour and community context.

Read The Transcript:

Ben Felix: This is the Rational Reminder Podcast, a weekly reality check on sensible investing and financial decision-making from three Canadians. We're hosted by me, Benjamin Felix, Chief Investment Officer, Dan Bortolotti, Portfolio Manager, and Ben Wilson, Head of M&A at PWL Capital.

Dan Bortolotti: Happy New Year, everyone.

Ben Felix: Yeah. Welcome to the first episode of 2026.

Ben Wilson: We're on episode 390. It's crazy, almost 400 episodes.

Ben Felix: Yeah, that is crazy. We've already got guests booked until, I don't know, March or April of this year. Some great, great guests.

It'll be good as always. I wanted to take a minute at the beginning of this episode to talk about the podcast for a second. As we say in the introduction, this podcast is aimed at promoting the principles of sensible investing and financial decision-making for anybody.

We used to say in the intro that it was for Canadians, but we had people who were from places other than Canada give us feedback that it was alienating. We changed it to from three Canadians. Anyway, we are Canadian, but the podcast content tends to be globally applicable.

The hosts, which it's the three of us today, as I mentioned in the introduction. We also have Cameron Passmore who co-hosts occasionally. He used to be the main co-host with me, but that's changed over time.

All of us are employees of PWL Capital, which is a Canadian wealth management firm that uses low-cost investment products, meaning low-cost index funds or funds from a company called Dimensional Fund Advisors. We also emphasize the intersection of financial planning and sensible portfolio management, as opposed to doing either one of those things in isolation. Instead of me talking about the podcast, which I'm sort of uncomfortable doing, I don't know, talking about why the podcast is awesome.

I wanted to, and this is why I had the idea to talk about this. I want to quote one of the members of our online community, which is a whole other thing. We have an online community with, I believe it's 13,000 users now.

It's at community.rationalreminder.ca. You should check that out if you want to dive into the podcast in more ways than just listening. Anyway, there was a discussion going on in the community about how to describe the podcast to someone. It was in the context of, if I want to introduce somebody else to the podcast, what's the best way to explain it?

This user, PicassoSparks, is their username. They gave their take. I'm just going to read what they said.

The idea was maybe we could do an episode that could be used as an introduction to the podcast for a new listener. I love that idea, but we didn't have time to write that episode today. I'm going to read what PicassoSparks said.

Here's a quote. For me, what makes RR, Rational Reminder, uniquely good is the emphasis on evidence-based insights. We get that in two main forms.

One is the synthesis episodes where someone, often Ben, that's me, takes us through a conversational summary of the research on one topic or another, which is what we're going to be doing in this episode today. The other is more cutting edge interviews with guest experts who share the state of their research through friendly inquiry. We also get the personal hosts talking to each other.

Ben Wilson often makes fun of me, which people seem to love. The longitudinal discussions where topics are returned to from previous angles over time. Debates don't happen in a single episode.

They happen over time. I love that. This is my commentary now.

I love that sentence because it's something that I do think about. I don't love the debate format, especially for a podcast. If you're trying to learn something, my opinion on debate is that you learn more about someone's skill as a debater than you do about the actual underlying topic.

What we do try to do is if there's a line of inquiry or a question or something that we agree or disagree with, rather than hosting a debate about it, we will find people who have expertise in that specific topic and we will ask them questions. That might play out over five, six episodes, maybe even a whole year of the show, but we get this kind of slow intentional inquiry about stuff that we think matters. Anyway, PiccassoSpark's last comment here is, it's kind of funny.

There's also a bunch of aspects of the format that are kind of weird. For example, few people record the main content and then record the introduction. The way that we handle listener feedback on the air, which we often do, I guess we're kind of doing that now.

The disclaimer, which they say should not be filed down for the first listener episode. The disclaimer is at the end of the episode. It's always going to be there.

If you listen to the behind the scenes episode, which was I believe two episodes ago, you would have gotten the behind the scenes look at the genesis of the disclaimer. That's it. For new listeners, I hope that's a useful kind of introduction to the podcast and what it's about and what our listeners find makes it unique. Yeah, that's it. Any comments from you guys?

Dan Bortolotti: It's always been great the way you've managed to add some variety to the format of the episodes. It's always a struggle. I know when you do a podcast, especially as many episodes as there have been with the Rational Reminder, you got to have a number of different genres that you can rotate through, but also be flexible to just, look, I have a good idea.

It doesn't really fit one of these former genres. Let's just do it and see how it turns out. And as long as you can do it on the fly and it's thoughtful and you're well-prepared, it usually results in some good content.

Ben Wilson: So one of the things that sticks out for listeners is that it's educational, teaching people about topics, trying to be as unbiased as possible and supporting with data and evidence to teach people and help them make informed decisions.

Ben Felix: That's pretty much the objective. And we learn a ton too. This whole podcast has been a learning journey for us as well about the underlying material that we're talking about and also about podcasting and communication and community building and all that kind of stuff.

Ben Wilson: And it's not just me making fun of you. You give your own fair jabs back to me.

Dan Bortolotti: I just try to stay out of the crossfire.

Ben Felix: Yeah, you do a good job being a neutral third party here, Dan, and making fun of each other discussions.

Dan Bortolotti: Should we jump in?

Ben Felix: Yeah, let's go. So we have a topic today that I'd be curious before I jump into the topic, Dan and Ben, if you guys have been hearing about this, but this is – I'm the chief investment officer at PWL Capital. We have a team of advisors who deal directly with clients and those advisors will often come to me if they have questions that are coming up consistently.

And the advisors will come and say, hey, do we have any research or content on this thing? So the thing that's been coming up the most frequently for me in those conversations recently is the topic of US stock market concentration and what some people are perceiving as an AI bubble. And so we have had some clients really, really concerned about that to the extent that they're considering taking their money out of the stock market entirely, which is conversations like that happen from time to time for various reasons, but that's the way that that is materializing right now.

The vector through which it's materializing is the idea of an AI bubble. I have a whole bunch of thoughts on this, but before I get into that, I'd be curious if you guys are hearing about this as well.

Ben Wilson: Definitely. Hearing these types of questions all the time in client meetings, it's the AI bubble concern, but I think also there's still uneasiness, especially from Canadians and the political landscape in the US and wondering what could happen if there's any volatile decisions and how that could impact the market. That's often a fear that comes up.

And it's just also general fear when markets are higher at all time highs, people tend to be like, well, if it's this good now, when's it going to drop?

Dan Bortolotti: Similar sorts of feedback, not just focusing on the concentration in the index, but just focusing on US stocks in general, a combination of many years of outstanding returns, which everybody likes to comment can't last forever, which is true, I suppose. And just concerns about the political climate as well. And what I'm getting this year that we haven't had in the past is the concerns about US markets being too pricey has been around for years.

This year, of course, there's some emotional component to it as well. And some people feeling like I have concerns about investing in the US market as a Canadian, it rubs me the wrong way, always problematic to make investment decisions based on emotion. But also as an advisor, you have to respect the emotions of your clients.

Try to encourage them to do the right thing objectively, but at the end of the day, you can never be dismissive of those concerns. So you just try to manage it and mitigate it.

Ben Felix: Investors have to be aware of their emotions. You don't want to make decisions that make you feel terrible, even if it's a good decision. If you feel really bad about it, it's probably, well, it's probably not a good decision.

I don't think you can let your emotions completely guide your decisions either. Finding some middle ground. My notes are on two main topics.

One is on market concentration in the US specifically, and on US valuations, which are two things that are loosely related and I'll kind of talk through that relationship. But that's to your point, Dan, from what you're hearing, that's really related to this idea that the US stock market has done really, really well recently. And two of the results of that are, or at least two things that are related to that, are a small number of US stocks having done really, really well, which has driven up the market.

And one of the results of that is also that the valuations of those stocks and therefore of the US market is really, really high. We all believe in the general principle of index investing, being broadly diversified, owning the market. One of the benefits of index investing is supposed to be broad diversification.

But right now, the issue in the US stock market is that 36% of the S&P 500 consists of just seven stocks. So that's the mag seven or magnificent seven that we hear about. Those stocks currently make up 36% of the US market.

If we look at the total US market, instead of just the S&P 500, the S&P 500 is 500 leading US companies. They tend to be some of the largest companies in the US market. If we instead look at a total market index, which includes large, medium and small size companies, those top seven make up 32% of the index.

Now, either way, whether we look at S&P 500 or total market, that is the most extreme level of index concentration in US market history, going back to 1927, which is where I have data going back to. They're also nearing valuations, so concentration highest it's ever been, back to 1927. Market valuations are nearing their 1999 peaks.

If we go back to 1999, that period was of course followed by, well, maybe I shouldn't say of course. If people are not aware, those 1999 peaks were followed by a decade of flat US market returns. If we look at just US large caps or just US tech stocks, it was a decade of negative returns and in some cases, in some subsets of the market, took much, much longer to recover.

Some segments may still be underwater from the initial peak to today. With that setup, I can see why that would seem concerning to people. If that small handful of stocks, if those magnificent seven stocks decline in value, the effect on the overall market, because of the concentration is so high, could be substantial.

Now, an interesting point, I think, is that this is a movie we have seen before in Canada. In July of the year 2000, one stock made up about 36% of the entire Canadian market index. It subsequently crashed.

It actually became worthless eventually. It was a proper crash, not just a drop in price. That did drag the Canadian market down with it. That's scary.

Dan Bortolotti: Are we not mentioning the name of the stock?

Ben Felix: We can. It's Nortel. I have the name mentioned later.

It's trying to build some suspense. I don't know.

Dan Bortolotti: Okay. I apologize for stealing your thunder.

Ben Felix: It's okay.

Dan Bortolotti: I thought we were sneakily avoiding it. It's not like they can sue us.

Ben Felix: That's a very good point. They cannot sue us. That's, I think, the main concern.

The US market's really concentrated and if we end up in a Nortel-like situation, that would be not very good. Now, the good news is, well, I think there's a couple of pieces of good news. One is that stock market concentration is probably not as bad as people imagine.

The other one is that mitigating the worst of these situations of high market valuations and market concentration is really not that hard. I won't spoil what it is yet, but it's not a big deal if you're investing what I would call properly. Okay.

There is legitimately wild stuff happening in the US market right now. A handful of companies have been spending just an insane amount to build out the infrastructure needed to capitalize on the so-called AI revolution, to be determined how revolutionary AI ends up being. It's got a lot of promise and people are investing in it very, very heavily in the hopes of earning profits from that promise.

Now, this type of spending, really, really aggressive capital expenditure often coincides with the development of revolutionary technologies. If we look back at history, things like railroad, the internet, they followed a similar path of really high asset prices, which we're seeing with AI related stocks now, massive investment in infrastructure and then an eventual painful fall in asset prices, which we might describe as a bubble. We get these huge run-ups in prices and a lot of investment and then prices come down.

Now, those bubbles, if we want to call them that, are just like periods of unusually high stock prices followed by much lower stock prices. Those have been happening forever in financial markets. They're often, but not always, sparked by some new technology that promises huge profits for those developing it, which is exactly what we're hearing with AI right now.

Now, that history of bubbles goes back to at least the 1700s. That's when we have documented evidence of technology-related asset price bubbles. That was with canals.

They follow a similar pattern with each successive major technological innovation. In this discussion, what I want to talk about are the two, in that context, the two main features of the current US stock market, which are, as we discussed earlier, causing investors some worry. One is high market valuations and the other is stock market concentration.

Now, they're loosely related measures. Market valuations measure how expensive it is to buy the expected future earnings or some other fundamental of a company. Market concentration measures how concentrated the market's total value is in a small number of stocks.

High market valuations are generally associated with lower future returns. Market concentration and future returns has a really noisy relationship, if there's any relationship at all. We'll talk about some data around that in a couple minutes here.

Now, they're related because market valuations and concentration may increase around the development of new technologies, just because of the fact that as companies rise in value due to their association with the new technology, they will also make up an increasingly large portion of the market. Those two things can happen around the same time for similar reasons, but they're different phenomenon. Any comments from you guys before I keep going here?

Ben Wilson: One thing I was going to say is that the high market valuations are often a concern of investors, but the hard part to separate is if that high market valuation, even if we knew that high market valuation is going to lead to a downturn, predicting when that downturn happens is almost impossible. At what point do you decide to get out before you jump back into the market or adjust your asset mix accordingly? It's a very difficult problem to solve, which is why it's better to just remain committed to your plan.

Ben Felix: We could have had a similar conversation, not the AI part, but about valuations in 2021. Valuations in the US market back then were not quite as high, but almost as high as they are now. If you said, okay, I'm getting out of US stocks in 2021, that was a big whoopsie because they've done very well since then.

Dan Bortolotti: That is a story that I feel like we've been telling for a very long time. As long as I've been doing this, I think people have said US stocks are overpriced and yet they keep marching on. You might be right one day.

Ben Felix: One day.

Dan Bortolotti: We just don't know what that day will be.

Ben Wilson: On the concentration piece, if you're in a properly diversified portfolio that rebalances, yes, US companies make up a large concentration, but over time, that will automatically rebalance according to the market cap weights in your portfolio.

Ben Felix: I agree with that. The really interesting thing though, and I was surprised by this too, is that when you look at the data on the relationship between concentration and future returns, it's like there's not a whole lot there to look at. That whole concern about concentration is probably overblown.

Valuations I think is a different story and we'll talk about the data around that in a sec. You're right, Ben. Being diversified outside of the US market and even being diversified within the US market, you don't have to hold the US market at market cap weights.

Both of those are ways to deal with the concentration issue if you're worried about it. When you look at the data, the concentration issue is probably not even an issue that needs to be addressed, which is a weird thing to think about.

Ben Wilson: One thing I find interesting is that when you talk to newer investors in particular, I'm taking an index approach. I just go by the S&P 500. It's a diversified approach.

It is diversified to an extent, but you're really still concentrated in one market.

Ben Felix: We will talk about the Japan example, which I think is not saying that the US is Japan, but there is some data around what happened with the Japanese market historically that I think are instructive about what you're talking about there, about diversifying outside of a single market. Okay. Bubbles are super exciting on the way up, often inducing FOMO that may further feed into the bubble dynamics because people are like, wow, everyone's getting rich.

I don't want to miss out. They go and buy whatever the thing is that has been going up, which causes it then to go up further. Now, as exciting they are as the way up, they're often pretty painful.

They are painful on the way down. Keeping in mind that we can't predict whether something is going to be a bubble before the fact. Oh, this asset price went up.

That does not mean it was a bubble, but we can look after the fact and say, okay, asset prices got really, really high and then crashed back down to where they were before, or maybe even lower. We would call that after the fact a bubble, but it's really hard to say before the fact that it was a bubble. Now, the pain of bubbles can be both psychological and economic.

You can lose money. You can also feel really sad. They can also hurt the broader economy, not just you as an individual.

They're not all bad though. Bubbles, it's a really interesting literature on bubbles. You get these high stock prices that come from speculation about the profitability of some new revolutionary technology.

Those high stock prices actually facilitate the technology's development and deployment into the economy. It's like a high stock price. Another way to say high stock prices is a low cost of capital.

When there's these revolutionary new technologies, there's lots and lots of potential companies in that area who have their stock prices shoot up, they're getting access to really, really cheap capital, which lets them make all of these investments and build out the cool stuff they're working on, but it's just not great for investors. A low cost of capital to the company is a low expected return to the investors in that company, which is exactly how we see this play out in the data.

Dan Bortolotti: Was that the case during the original dot-com bubble, that there was so much money flowing into companies who maybe were doing some activity that actually helped promote the internet as a technology, as a potential business tool? Those individual companies ultimately failed, most of them, but what they left behind was actually useful in deploying that technology, as you said, into the economy. Other people came in, either got the ideas or got the infrastructure and started profitable businesses after the other ones were left in the dust.

Ben Felix: I think that's exactly it. You look at e-commerce. Okay, we're going to sell stuff online. There were a ton of e-commerce companies that had crazy high valuations and absolutely nothing actually happening under the hood other than idea. A lot of those disappeared. We hear about whatever, pets.com as an example, right?

Dan Bortolotti: Well, that's my favorite one, right? Because people laugh at it and it's like, can you imagine people buying pet supplies online? Pretty sure people do that now.

Ben Felix: Yeah, they do.

Dan Bortolotti: The point wasn't that it was a dumb business idea. The point was, they just weren't selling any pet supplies online despite all of those valuations.

So, it's really funny that we look back at these and call them bubbles and then you scratch the surface about what the ideas were. And it's like, there was nothing necessarily wrong with the ideas. They just couldn't be implemented profitably.

Ben Felix: And there is a whole debate about, are bubbles irrational phenomenon or due to speculation or do they reflect real potential economic fundamentals like what you're talking about? Like those companies, maybe they really did deserve those valuations, just that not all of them, not every single company that had that type of valuation was able to hang on to it. And then you take Amazon as the counterexample to pets.com they've done absolutely incredibly well. And they've kind of taken over the market in a lot of ways. So, there were winners, but there were just lots and lots of losers. And this is kind of what tends to happen.

But that ridiculously low cost of capital back in the late 90s is what allowed all of that experimentation and idea generation and physical infrastructure, which I'll talk about in a second here to happen. So, on the physical infrastructure front, the two kind of classic examples are the massive amount of spending on installing fiber optic cables in the late 90s. That's like internet infrastructure, physical infrastructure.

Another one is railway tracks in the 1840s. So, those are two cases where a ton of the companies involved were able to raise a ton of capital. They had really, really high valuations, low cost of capital, excited investors, in many cases, novice investors pile in, but their share prices subsequently crash.

There wasn't enough demand to use all the track that was installed or use all the fiber capacity that was installed. And so, these bubbles do tend to come with a waste. There was too much fiber optic cable laid in hindsight.

There was too much redundant railway track in hindsight. A lot of the track never got used or was not in a place that was useful in hindsight. But despite that waste, the infrastructure for those respective technologies does get created during the bubble period.

And that paves the way for a potential economic golden age. Like railways were economically transformational. The internet was economically transformational.

But the investors who funded their initial installment into the economy, they did not do very well. So, Bill Janeway, who's an economist and a venture capitalist who we've had on this podcast, he's written a book on this whole idea. He calls these productive bubbles.

So, probably a net good thing for the economy, even if they can be really painful for investors. But this pattern of investor excitement, high stock prices surrounding technological revolutions or potential technological revolutions, it goes back hundreds of years and it follows this really similar path. We get high stock prices driven up by some combination of profit potential from the revolutionary technology.

And then once asset prices start rising, we get some speculation that prices are going to keep rising, which has the self-fulfilling prophecy for a while. And that eventually prices come back to earth, which results in low returns for anyone who bought, especially near the top. Now, all that said, interesting history, interesting theories, whatever.

I don't know if that's what we're seeing right now in the US. As I mentioned a minute ago, we can only know that in hindsight. Prices could remain high.

There's lots of other ways or fundamentals could continue to surprise investors as they have in recent history. So, I'm not saying the US is in a bubble, but it's like, hey, there's this history of bubbles. The US market looks the way it does.

You take that for what it is. Another important point here is that the rapid rise in prices of those top US stocks has also been accompanied by rapid earnings growth. So, it's not just hype.

These companies are absolutely crushing it. There's some economic substance here. But what we do know, the facts that we have available to us, is that a large portion of the US market's return, earnings growth and capital expenditure has come from AI-related stocks since the launch of ChatGPT.

There's a September 2025 report from JP Morgan that explains that AI-related stocks have accounted for – these numbers are crazy – AI-related stocks have accounted for 75% of S&P 500 returns, 80% of earnings growth and 90% of capital spending since ChadCPT was launched in November 2022.

Ben Wilson: Those are wild numbers.

Ben Felix: Crazy numbers. 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 what can lead to market concentration. You get 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. That's been discussed a lot. There've been lots of media articles about whether or not we are in, US market is in a bubble.

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?

Ben Wilson: 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? 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.

It comes back to the crystal ball debate. 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.

Ben Felix: Did you read ahead of my notes, Ben? Because I'm pretty sure my last sentence is, the main lessons are diversification and discipline.

Ben Wilson: I did not read ahead of the notes. Stealing the thunder again.

Ben Felix: Okay. The Canadian example that I alluded to earlier that Dan forced me to disclose was Nortel.

Ben Wilson: Spoiler alert.

Ben Felix: Right. That was even crazier than what we're seeing in the US market.

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. It was making really useful stuff that the world needed at the time to build out the internet. Actually really interesting.

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. 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.

It 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 Schiller cyclically adjusted price earnings ratio of 60.62, much higher than the US's peak.

Dan Bortolotti: What's a more long-term average? Something like 15 or 16 or something like that?

Ben Felix: Maybe a little higher now. I'd have to look at the data. Yeah, 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. Yeah, Canada has never come even close to where it was then.

Just for listeners who are not aware, the Schiller cyclically adjusted price earnings ratio measures market prices against the index's 10-year average real earnings. 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 Schiller 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 and that has happened in the US market. It's a noisy but useful predictor of, hey, valuations are high, that means expected future returns are low. We do have some interesting data to talk about with respect to that in a bit.

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. 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. I read this one interview where somebody gets to the company and there's 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.

The person from Nortel is like, what do you mean this is the product? The person from the acquisition is like, well, you guys bought an idea, there's no product here. 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.

Nortel goes bust, big time, bankruptcy type bust. Because it made up 36% of the market at the 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. Despite 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 in a long track record of pretty good performance.

Canada's 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 of the US has taken off. One lesson is, yeah, that was painful, but the Canadian market, despite its concentration, was able to recover in pretty short order.

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, that's stocks with low prices relative to their fundamentals, they did not crash when the overall market did. 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.

So 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.

The lost decade is the US market crashed around March of 2000, measured in US dollar terms. It took about a decade to recover, measured in Canadian dollar terms because the USD was not so hot over this period. It took until July of 2014 for the US market to recover, 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.

Ben Wilson: The lost decade, I don't think it's as common as we think in our circles. I'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.

Dan Bortolotti: 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 because 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.

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. Anything earlier than that, we've just forgotten about, I think.

Ben Felix: I would love to see that blog post. I would also love to see the comments on that blog post.

Dan Bortolotti: People telling me I was crazy. I'll have to dig into the archives for it, the way back machine.

Ben Felix: Oh, that'd be a cool one to find.

Ben Wilson: 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. 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, well, let's keep some. Let's get away and reduce this strong overweight or let's increase it to capitalize on the returns.

Dan Bortolotti: Balanced opinions are boring. 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.

Ben Wilson: 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. It's not that obvious.

Ben Felix: And the US market's been crushing, but I'm going to talk about the Japan example later. Japan absolutely crushed for decades before it didn't. I 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.

Dan Bortolotti: Well, there's another argument right there for global diversification and you cover three decades, right? I mean, in the eighties, it was Japan and therefore like non North American stocks. And then in the nineties, it was the US.

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.

If 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.

Ben Felix: It is simple, but not always easy to get across or to stick with. Some of 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.

Dan Bortolotti: Somebody said to me one time that if you love everything in your portfolio, you're not diversified enough. And 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.

Ben Felix: The last decade for the US market, it was partially related to the, I just want to be fair here, partially related to the.com internet bubble, but it was also hit with the great financial crisis. 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. I 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. It 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. Now, 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. 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. It's not like this is a silver bullet to fix everything.

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. 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 lunch in investing for good reason. We cannot predict which countries or companies will contribute to future returns.

It follows that being overly concentrated in any one company or country leads to unnecessary risk that can be easily diversified away. The 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.

It's like the valuation thing seems to matter. I know that was just anecdotal. I've got more data in a second here.

The concentration thing is not as obvious. I think a point that often gets lost in discussions about the US market's 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. The 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. That return trails the US market return.

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, at best noisy.

I don't think there's a whole lot of relationship going on there. The other thing I looked at, I looked across those 10 non-US markets, where I only had 10 years of data. 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.

I sorted 10 year future returns on the starting level of market concentration in the top seven stocks. 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, so there's a good chance it's just noise in the data.

Even statistical significance aside, it's a pretty weak economic relationship.

Dan Bortolotti: 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.

In terms of risk adjusted returns, how does the concentration affect that? I don't know if you know that or have that data.

Ben Felix: I 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's 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.

He actually talked about some of these same examples over a similar data set over a similar time period. He said in his analysis, he does not see any differences in risk over time. I have not replicated that, but his comments, like he's a credible economist.

I think his comments are worth mentioning there. A 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 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.

Dan Bortolotti: Good way to look at it, yeah.

Ben Felix: 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? His 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, Owen Lamont's smart. Anyway, I do like that AT&T perspective.

One thing that does appear in the data, and this came from a paper that Michael Mauboussin, 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. That 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. 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. On 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. I looked at rolling 10-year periods of a 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. 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.

They're not really independent observations. 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.

Now, 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, so I've read. 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.

If you had invested at the peak, you have not recovered in real terms to this day.

Dan Bortolotti: 36 years.

Ben Felix: It's a long time.

Dan Bortolotti: Yeah, coming on 37. That's insane.

Ben Felix: Wild. There are two things that would have saved an investor in Japanese stocks in 1989.

It comes back to things 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.

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 to think about. I 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 valuations 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.

Ben Wilson: One thing I often wonder, and I don't know if there's any data to support or dispute this, but 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?

Ben Felix: Yeah. There is a paper that looks at the increasing correlations across global stock markets over time. It's asking the question of have the benefits of diversification declined?

What they show is that the increase in correlations is driven mostly by increasingly correlated discount rate shocks. 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.

The discount rate, the other one is cash flow expectations. If we have increasing discount rates, stock prices go down. If we have decreasing cash flow 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.

The cash flow component has continued to be uncorrelated. That means that in the long run, markets will produce different cash flows 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. 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.

The benefits of diversification for long-term investors, I think is still very, very strong.

Ben Wilson: Super interesting.

Ben Felix: That's a neat paper. We talked about it when we did our episode on the benefits of international diversification. 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.

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. 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. 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.

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. There'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.

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. 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. When you do a proper statistical test of that relationship with the proper adjustments for overlapping samples, there will be no statistical relationship.

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. 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. I think if you're in one market, if you're in Japan in 1989, being disciplined is probably hard over the next 37 years.

If you're globally diversified, yes, Japan does poorly, but the other holdings in your portfolio do well. 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.

Ben Wilson: 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. No matter what happens in the market, our position supported by data is that it's better to remain diversified and disciplined. 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.

Dan Bortolotti: It raises some interesting questions to me 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 US investor, I've often seen people say, go 50% US, 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. We're holding Canadian, US, and international. 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. 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 companies in Canada, but no individual company is allowed to represent more than 10%.

Right now, no individual company does. 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%.

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, you said it was around 35%, 36% or something. 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, but 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 it 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.

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 7, 8, 9, 10% is plenty.

Ben Felix: I want to see if I can pull up the underlying holdings of something like VEQT.

Dan Bortolotti: Yeah, that's a good point. When you put it in a global portfolio, each individual company is not going to be that much.

Ben Felix: Of course, VEQT holds ETFs, so pulling up the underlying holdings is not as obvious.

Dan Bortolotti: Even if you looked at Vanguard's VT would probably be a good one. It's a little different. VEQT is going to have much more Canadian focus, but each of those individual Magnificent Seven as a proportion of the global stock market as opposed to as of the S&P 500, obviously going to be much, much lower.

The concentration has to be seen in that perspective, I think.

Ben Felix: I 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. 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.

Dan Bortolotti: 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. These 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. They might have been limited. They probably couldn't have put 36% of their fund because mutual funds do have limits on concentration.

If they were reducing their allocation to Nortel, it was probably because they had to, not because they had any insight into its overvaluation.

Ben Felix: There was an article by Michael Mauboussin on market concentration. 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. 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.

Dan Bortolotti: It's still pretty – Or even 50, right? Yeah, not even 50. It went from terrible to almost a coin flip.

Congratulations. These are the small triumphs I guess we have to cling to.

Ben Felix: 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. 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.

To your point, the opportunity is that you get a little bit worse than a coin flip instead of much worse.

Dan Bortolotti: If you extend that over both periods, 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. If you put those two together, they don't even out.

It's net negative for the active manager. 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.

Ben Felix: Yeah. After the fact, you can say, well, the fundamentals didn't make sense, but before the fact, you can't say that.

Dan Bortolotti: Except for 12 years, it was the best performing sector, and now I'm identifying it after the fact as a bubble.

Ben Felix: Yeah. I hope that discussion helps. We want people to stay invested in a portfolio that makes sense for them.

We 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. 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.

Dan Bortolotti: Indeed.

Ben Felix: Quick after show here. We have one review, a rare one star.

I'll 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.

Dan Bortolotti: But we could probably safely assume this guy is not a client.

Ben Felix: I hope not.

Ben Wilson: Well, they're also from the United States, so it's almost guaranteed to be not a client.

Dan Bortolotti: Fair enough.

Ben Felix: 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 trickled in index circle jerking unfollowed. And that is written by Fartcoin Designer.

So Fartcoin Designer, we are very sorry to see you go. We wish you all the best in your future Fartcoin 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.

So 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. That 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.

Ben Wilson: 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'd already decided the other route, but it actually ended up being better for them. It was not about the self-praise. It was really about the cool analysis.

Ben Felix: 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 very sorry. Any other comments from you guys?

Dan Bortolotti: Well, I think that's good.

Ben Wilson: Yeah, that was a good one.

Ben Felix: All right. Thanks for joining, guys. And thanks everyone for listening.

Disclosure:

Portfolio management and brokerage services in Canada are offered exclusively by PWL Capital, Inc. (“PWL Capital”) which is regulated by the Canadian Investment Regulatory Organization (CIRO) and is a member of the Canadian Investor Protection Fund (CIPF). Investment advisory services in the United States of America are offered exclusively by OneDigital Investment Advisors LLC (“OneDigital”). 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; the 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 adviser 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 in directly. All 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 OneDigital nor PWL Capital has any obligation to provide revised statements and/or opinions in the event of changed circumstances.

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