Introduction: The market capitalization distribution of the capital market, whether observed from the macro or micro level, shows a significant imbalance.
Mastering the core attributes of capital markets is critical to investment success, but the task is often challenging. Just as "looking horizontally at the side of the ridge is a peak, and the distance and the height are different", each investor has his own unique investment philosophy and perspective to look at the market. In this article, I will share my deep understanding of the two core characteristics of capital markets from the perspective of a long-term value investor, and explore how these understandings have influenced and guided my investment practice.
1. Extreme skew observation of the market value distribution of listed companies
When discussing the complex phenomenon of the capital market, we often borrow the "black swan" theory of the famous risk management scholar Nassim Nicholas Taleb, in which the concepts of "average stan" and "extreme stan" reveal the distribution law in different fields. In the capital market, the distribution of the market capitalization of listed companies is exactly in line with the characteristics of "extreme stan", that is, the differences between individuals are significant, showing extreme asymmetry.
According to the latest statistics from the World Federation of Stock Exchanges (WFE), the total market capitalization of global exchanges in the second quarter of 2023 was about $109 trillion. However, this large market capitalization is not evenly distributed, but is concentrated in the hands of a few giant companies. Further down to the various exchanges, we can also find a similar pattern. Taking the U.S. stock market as an example, among the nearly 5,900 listed companies, the top 10 giants by market capitalization account for more than 22% of the entire market. On the Vietnam Stock Exchange, although the number of listed companies is relatively small, the market capitalization of the top 10 companies accounts for more than 77%.
These data clearly show that the distribution of market capitalization of listed companies is extremely skewed, both globally and within specific exchanges. This asymmetry is not only an inherent attribute of the capital market, but also provides an important reference for us to understand market dynamics and formulate investment strategies.
2. The nonlinear trajectory of the evolution of the market value of listed companies
In the core idea of value investing, a company's market capitalization is often seen as a reflection of its intrinsic value, such as profitability or free cash flow, and fluctuates on a value-based basis. However, it is important to note that this movement in value does not follow a simple linear trajectory, but exhibits significant non-linear characteristics, resulting in extremely sharp and unpredictable fluctuations in market capitalization.
As human society moves from the agricultural era to the industrial age, and then to the information technology revolution (which is now on the eve of the artificial intelligence revolution), the non-linear change of corporate value is becoming more and more significant. It is important for investors to understand and grasp this non-linear change, as they can miss out on most of their investment gains if they miss the stage when a company's value increases dramatically.
Let's explore this feature further with two vivid examples:
(1) The growth of NVIDIA's market capitalization shows a remarkable phenomenon. Over the nearly 25-year observation period, nearly 80% of NVIDIA's market capitalization growth has occurred in the most recent 5.88% of the time, i.e., 2023 to date. This extraordinary rate of growth highlights the non-linear nature of the evolution of the market capitalization of technology-based companies.
(2) The change in the proportion of Tesla's market capitalization is also thought-provoking. Based on the market capitalization peak on March 31, 2022, Tesla's market capitalization growth of about 80% in the statistical period of the past 12 years has been achieved in just one and a half years, accounting for 12.5% of the total duration. This rapid growth momentum once again confirms that the change in the company's market value is closely related to the business model, especially for technology-based companies.
Therefore, the second significant feature of the capital market is that with the evolution of business models and the rapid development of technology, the evolution of the market value of listed companies shows more and more obvious nonlinear characteristics. This requires investors to have keen insight and flexible investment strategies to capture these potentially significant growth opportunities.
3. Investment implications for market value distribution and change characteristics
A better understanding of market capitalization distribution and its changing characteristics is of great significance to guide our investment practices:
1. In the broad picture of the capital world, both the market value pattern from a global perspective and the market value distribution of a single market show significant horizontal asymmetric characteristics. For investors, this means that selective focus on key countries, industries and companies is often the key to maximizing returns.
2. There is an old proverb: "Sharpen the knife and do not cut the wood", the connotation of which lies in the value of preparation and waiting. This is particularly evident in the evolution of the market capitalization of technology companies. The nature of non-linear market capitalization changes not only emphasizes the value of long-term investments, but also highlights the importance of in-depth research on company fundamentals. Focusing too much on short-term price fluctuations can cause us to miss out on companies that truly have the potential for long-term growth. It is also a reminder to be sensitive to subtle changes in market sentiment and technology trends so that we can accurately identify and invest in companies with disruptive potential in the early stages of market capitalization growth. Through these practices, we are able to navigate the ocean of investment more intelligently and seize more opportunities.
4. Investment implications for market value distribution and change characteristics
In-depth analysis and understanding of the market value distribution of listed companies and their changing characteristics is not only a cognition of the current market situation for investors, but also an important guide for future investment directions and strategies. Below, we will further expand and polish the relevant investment implications based on these characteristics.
1. Enlightenment of asymmetric normal distribution
In the grand picture of global capital markets, the asymmetric normality of market capitalization distribution reveals the complexity and variability of the investment world. This means that instead of distributing wealth and opportunity equally, the market tends to concentrate in certain countries, industries, and companies. For investors, this is not only a challenge, but also an opportunity.
Proactive selection of key countries, sectors and companies means that we can have a more accurate pulse on the market and access more investment opportunities. This choice is not blindly following the herd, but is based on in-depth analysis and research of the global economic landscape, industry trends, and company fundamentals. Through careful selection, we are better able to achieve optimal allocation of assets and obtain higher investment returns.
2. The importance of long-term investment and company fundamental research
In the evolution of the market capitalization of technology companies, we see a significant feature of non-linear changes in market capitalization. This change is not only eye-catching, but also has profound implications for investors. It tells us that investing is not a short-term act that can be achieved overnight, but a long-term process that requires long-term perseverance and sustained attention.
The importance of long-term investing is that it allows us to better observe and understand the company's growth trajectory and development potential. It is only after a long period of accumulation that we are able to more accurately assess the value and prospects of the company. At the same time, long-term investment can also help us avoid being distracted by short-term fluctuations in the market, and maintain a clear mind and cool judgment.
In addition to long-term investment, in-depth research on the company's fundamentals is crucial. The company's fundamentals include its financial position, business model, competitive advantages, and other aspects. Only by understanding these aspects can we more accurately assess the value and risk of the company. Through in-depth research on the company's fundamentals, we can better grasp the company's long-term development trend and potential, and provide a more solid basis for investment decisions.
3. Insight into market sentiment and technology trends
In the early stages of market capitalization growth, it is often accompanied by subtle changes in market sentiment and technical trends. These changes may not be obvious, but they represent a huge investment opportunity. Therefore, it is crucial for investors to have keen market insight and technical sensitivity.
Market sentiment reflects investors' expectations and confidence in the company's prospects. When market sentiment is high, investors are confident in the company's future and are willing to invest more money. This change in sentiment is often accompanied by a rapid increase in market capitalization. Therefore, we need to pay close attention to changes in market sentiment in order to take advantage of investment opportunities in the early stages of market capitalization growth.
Technology trends reflect the direction and future potential of the technology industry. As technology continues to evolve, new technologies are emerging that could change the competitive landscape and business models of the entire industry. Therefore, we need to pay attention to the changes in technology trends in order to grasp investment opportunities when new technologies emerge.
In order to gain insight into market sentiment and technology trends, we need to constantly learn and update our knowledge base. By reading relevant reports, attending industry conferences, and communicating with professionals, we can obtain more information and perspectives, and provide a more comprehensive reference for investment decisions.
In conclusion, the distribution of market capitalization and its changing characteristics provide us with important investment implications. By proactively selecting key countries, sectors and companies, investing long-term and in-depth into company fundamentals, gaining insight into market sentiment and technology trends, and being flexible in adjusting our investment strategies, we are better able to capitalize on investment opportunities and achieve higher investment returns.
Source: Internet
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