Investing in a ‘Winner Takes All’ Economy

Index funds are going to become even harder to beat than they already are.

That is because we are increasingly becoming a “winner take all” economy dominated by a relatively few big players. Since no one has shown the ability to determine in advance who these winners will be, much less predict when one era’s winners will stumble and be eclipsed by the next generation’s, owning all stocks is the only realistic strategy for avoiding owning a portfolio of losers.

“Networking effects” are driving the winner-take-all economic shift, according to Geoffrey Parker, a professor of engineering at Dartmouth College. These effects come into play, Prof. Parker says, whenever a company’s users create value for other users. An illustration is Apple Inc.’s dominance of the smartphone industry: As more people buy iPhones, the more developers want to develop apps for those phones. And the more good iPhone apps there are, the more people want to buy those phones. These networking effects create a “virtuous cycle” in which one, or perhaps a handful of companies, eventually dominates the competition.

Read the full article at the Wall Street Journal. 

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