In the stock market, returns and market capitalization do not follow a normal distribution. Instead, they exhibit heavy-tailed, right-biased power-law characteristics. That is, a very small number of companies account for a very large share of total wealth creation, while many (or even most) companies underperform. This is because, broadly speaking, the growth potential of the largest companies is “unlimited.” Shareholders can earn many times their initial investment, but in the worst case scenario, if the company goes bankrupt, shareholders have limited liability and can only lose the amount they originally invested. One study found that while the top 4% of stocks generate all the long-term net asset creation, the median stock value significantly underperforms the index. Virtually every investor is familiar with the 10 largest constituents of the S&P 500: Nvidia (NVDA), Apple, Alphabet, Microsoft, Amazon, Meta, Tesla, Berkshire, and Eli Lilly. They may not realize that these companies generate an order of magnitude greater total profit than the average member. A cap-weighted index fully captures these far-right winners in proportion to their success. This is because each contribution to an index’s investment performance is functionally related to its size. As a stock’s market capitalization increases, its weight in the index automatically increases, while the weight of underperforming stocks decreases. This effect can be observed by comparing the total returns of two indexes, both made up of the same stocks. The S&P 500 (SPX) is market capitalization weighted, so there is no “rebalancing” by selling winners and buying losers. The other is the S&P Equal Weight Index (SPXEW). Rebalance, selling winners (strength) as they grow and buying losers (bearish) as their share of the index increases. The index decreases over time. Readers will doubt the results even before they are reported. This is because an equal weight strategy does the exact opposite of what common investing rules of thumb recommend: run away with winners and cut losses quickly. Since March 1992, investing in the equal-weighted S&P 500 has returned a very good 2,528.6%, while investing in the S&P 500 (cap-weighted) has returned more than 500% better, at 3,046.76%. If you stop there, a reasonable conclusion is to buy a passive market-cap weighted index fund that tracks the S&P 500 and stick with it. This is a solid strategy and suitable for most investors. However, some may note that the top stocks change over time. In the 1960s and early 1970s, Polaroid, Kodak, Digital Equipment, and the predecessor companies of Kmart were among the stock market’s biggest darlings. Polaroid, Kodak, and Kmart have filed for bankruptcy. Digital was absorbed and effectively disbanded. Exxon, the world’s largest company for much of the 1990s, is now about one-tenth the size of Nvidia. One of the reasons why top companies have historically lagged behind is due to economic changes and management failures. Few people use film today, as image processing is almost completely digital. The PC took over the mainframe. While it’s true that companies that made headlines decades ago, such as Disney, McDonald’s, American Express, and Eli Lilly & Company, are still here today, the law of large numbers is another reason why the biggest mega-cap stocks change hands. Mathematically, the growth rate of the largest companies will either converge to a GDP-like growth rate or be larger than the economy itself. What cannot happen will not happen. As of this writing, the top 10 largest companies account for more than 41% of the S&P 500 index, a historically high level. These companies collectively generated revenues of approximately $2.5 trillion, or more than 8.5% of U.S. GDP, and our actively managed funds held five of them (Alphabet, Lilly, Broadcom, Meta, and Nvidia). Lilly’s success long predates the existence of the other four companies, and while they are unrelated, it is unlikely that Alphabet, Broadcom, Meta, and Nvidia will be in the S&P top 10 in a few decades. Of the five companies, Nvidia’s growth has been the most phenomenal, and that’s the point. Growth wasn’t good or even great. That is unrealistic and cannot be sustained. I fully expect Nvidia to be the most profitable company in the S&P 500 in 2026, but I don’t expect that growth rate to be sustained, and growth is key to reaping the power law benefits. If you own stock, selling it can have negative tax implications. It’s still a great company, but if you want to generate even more profit from it, now is probably the time to consider selling the January 195 calls at $5.65. These offer nearly $10 of upside participation and a static yield of over 3% (over 22% annualized). Disclosure: None. 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