Is it fair to say that SP500 growth could just be a march towards monopolies?
$SPDR S&P 500 ETF(SPY.US$ $S&P 500 Index(.SPX.US$ This is something that I think about from time to time, but haven't ever seen it discussed.
Imagine that there are 1,000 companies in a country, each with an identical market cap of $1M. The SP500 in this theoretical economy would be $500M (say they have some clever way of picking the "top" 500). Then imagine that each company in the SP500 completely steals 100% market cap from one of the other 500 companies. Now each company in the top 500 has a market cap of $2M, and the SP500 index has increased a full 100%! This seems very exciting, and everyone who invested in one of those original companies, or some SP500 index fund, has doubled their investments, and the "economy is twice as large." However, no real value has been created, since this was a zero sum game.
Now I'm not claiming that the US economy operates in a zero sum game, and I do believe that real value growth happens almost every year. However, when I look at how much of the SP500 is attributable to Apple, Microsoft, and Google, I have to wonder how much SP "growth" is Apple stealing market cap from viable smartphone competitors, etc. Even if you were to measure the entire stock market--the market cap of all publicly-traded companies, you'd still be attributing "growth" to public companies stealing market cap from private companies, mom-and-pop shops, etc.
Furthermore, due to the increase of passive investing, there is a self-fulfilling cycle, where the companies that have stolen more market cap are having the value of their shares inflated by people like me who just passively throw my savings into an index fund. This gives their company a higher value, and allows them to raise more cash, higher better developers at a lower "price," etc.
I'm not condemning the system, but I'm interested in having a discussion about how we talk about growth. I'm sure people much smarter than me have made attempts at calculating the actual growth, and I'd love to talk about those efforts.
Imagine that there are 1,000 companies in a country, each with an identical market cap of $1M. The SP500 in this theoretical economy would be $500M (say they have some clever way of picking the "top" 500). Then imagine that each company in the SP500 completely steals 100% market cap from one of the other 500 companies. Now each company in the top 500 has a market cap of $2M, and the SP500 index has increased a full 100%! This seems very exciting, and everyone who invested in one of those original companies, or some SP500 index fund, has doubled their investments, and the "economy is twice as large." However, no real value has been created, since this was a zero sum game.
Now I'm not claiming that the US economy operates in a zero sum game, and I do believe that real value growth happens almost every year. However, when I look at how much of the SP500 is attributable to Apple, Microsoft, and Google, I have to wonder how much SP "growth" is Apple stealing market cap from viable smartphone competitors, etc. Even if you were to measure the entire stock market--the market cap of all publicly-traded companies, you'd still be attributing "growth" to public companies stealing market cap from private companies, mom-and-pop shops, etc.
Furthermore, due to the increase of passive investing, there is a self-fulfilling cycle, where the companies that have stolen more market cap are having the value of their shares inflated by people like me who just passively throw my savings into an index fund. This gives their company a higher value, and allows them to raise more cash, higher better developers at a lower "price," etc.
I'm not condemning the system, but I'm interested in having a discussion about how we talk about growth. I'm sure people much smarter than me have made attempts at calculating the actual growth, and I'd love to talk about those efforts.
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