Taking Stock 9 July 2026

James Lee writes:

The Long Way to the Point

I BELIEVE markets are a combination of mathematics and human psychology, so I often take learnings from all parts of the world - colleagues, fund managers, the odd politician - but recently a lesson came from my 13-year-old daughter who helped me articulate one of the most useful investment lessons I have learned over the years.

I was explaining how most chronic disease has a correlation to what we put into our body. I clearly was labouring the point, which probably tells you everything you need to know about the explanation. After listening patiently for a few minutes, she interrupted and said, “Dad, you often take a long time to get to the point.”

At first, I was not sure whether to be offended or impressed. I explained that sometimes to get to a destination we have to understand the journey, but the more I thought about it, the more I realised she had accidentally described one of the most important qualities in investing.

Almost everything in modern life rewards speed. Food arrives at our door in minutes. Money moves around the world in seconds. Artificial intelligence can answer a question before we have finished asking it. In most industries, speed is a competitive advantage.

Investing is different. In investing, time is often the competitive advantage.

That sounds simple, but it is strangely under-discussed. When people talk about investing, they usually talk about returns, valuations, interest rates, inflation, volatility, correlations and forecasts. They spend less time talking about the one variable that quietly determines whether those other things matter: time.

Benjamin Graham, widely known as “the father of value investing”, famously said that in the short run the market is a voting machine, but in the long run it is a weighing machine. Warren Buffett has said that the market is a mechanism for transferring wealth from the impatient to the patient. These ideas are repeated so often because they capture something deeply true. Eventually, fundamentals matter. Eventually, earnings matter. Eventually, value matters.

The most difficult word in that paragraph is “eventually”.

John Maynard Keynes offered the necessary counterweight when he warned that markets can remain irrational longer than investors can remain solvent. At first glance, Keynes appears to contradict Graham. One says value wins in the end. The other says irrationality can last far longer than expected. But I do not think they were arguing. I think they were describing two halves of the same reality.

Graham tells us where markets usually end. Keynes reminds us that the journey can be far longer, more painful and more expensive than we expect. Markets do become weighing machines. The challenge is surviving long enough for them to do the weighing.

That is why I think many investors ask the wrong question about risk. They ask, “How risky is this investment?” A better question is, “How risky is this investment for me?”

Risk is not universal. Risk is personal.

A 25-year-old investing for retirement does not face the same risks as a 75-year-old drawing an income. A billionaire can absorb a 50 percent decline very differently from someone investing their life savings. The investment may be identical. The investor is not.

Over time, I have come to think about risk in three dimensions. The first is willingness. Some people can sleep well owning volatile businesses. Others cannot. That is temperament.

The second is capacity. This is not emotional, it is financial. How much uncertainty can your balance sheet actually absorb? Can you survive several years of disappointing returns? Can your family? Can your business? Can your lifestyle?

The third dimension is time. How long do you have for your thesis to play out?

That question changes almost everything. A business that looks dangerous over six months may be extraordinarily safe over 20 years. An investment that appears safe over the next three months may become dangerous over the next decade. Time changes the meaning of risk.

This is why leverage deserves more respect than it often receives. People say leverage increases risk. That is true, but it is incomplete. More precisely, leverage shortens time.

A company without debt can be wrong for years. A highly leveraged company may only be wrong for months. An investor without leverage can wait for value to emerge. A leveraged investor may never get that chance. Leverage compresses optionality. It removes patience. It turns temporary mistakes into permanent losses.

It does not change whether Graham was right. It changes whether you survive long enough to find out.

This brings us to the present market environment. My broad view of markets is that rationality usually prevails in the end. I have lived through the technology bust, the global financial crisis, the Covid bust and boom, Brexit and countless other moments when it felt as though markets had lost their minds. Usually, given enough time, rationality returned.

But “given enough time” requires a lot of work, and to survive enough time you need to really understand the risks you face and where you sit on the three dimensions that make risk personal to you.

Today, investors face an unusually difficult combination. Many of the returns in global equity markets have come from a narrow group of very large companies tied to a single dominant theme: artificial intelligence. Wars, inflation, government debt, changing labour markets and geopolitical uncertainty make it difficult to build a coherent picture of who will benefit over the next decade. So the average investor does what the average investor has been taught to do. They buy the index. They keep costs low. They diversify. They avoid overthinking.

For much of the past 20 years, that has been the right answer. What I want to challenge today is whether the advice that worked over the past 20 years will work in the future.

What happens when what was the right answer has become so successful that it changes the market itself? I think an important acknowledgement needs to be made. The market you think you knew from the past 20 years is going to be vastly different over the next 20.

For years, the basic rules of investing seemed simple. Buy and hold. Keep costs down. Do not try to outsmart the market. In the long run, markets go up. That advice was reinforced by an extraordinary period. Interest rates generally fell. Globalisation expanded. Corporate profits grew. The baby boomer generation saved aggressively and poured money into capital markets. For long stretches, simply owning the index was not just sensible; it was brilliant.

Perhaps the best-known symbol of that era was Warren Buffett’s famous wager in 2007. Buffett bet that over the following decade, a low-cost S&P 500 index fund would outperform a carefully selected portfolio of hedge funds. At the time, many people thought this was provocative. Hedge funds had teams of analysts, access to management, complex models and the ability to invest almost anywhere. Surely they could beat a passive fund that simply owned the market and did nothing?

Hedge funds could not. Buffett won the bet comfortably.

The lesson appeared obvious. Buy the index. Keep fees low. Ignore the noise. Over long periods, you will probably do better than most professionals.

But something happened after that lesson became widely accepted. Passive investing did not merely become a better strategy, it became one of the dominant forces in global capital markets.

This was a new phenomenon, very different from the original thesis.

Every successful investment strategy eventually attracts imitators. At first, a few people copy it. Then more do. Then institutions adopt it. Then advisers recommend it. Then it becomes conventional wisdom. Eventually, the strategy no longer just operates within the market. It changes the market.

That is what has happened with passive investing. When Buffett made his bet, active fund managers and hedge funds managers, people who analysed and considered capital markets, were the dominant players managing circa 80% of all assets. Today passive investors and private assets are the dominant players with circa 60% of managed assets. In fact if you removed the money gained from market returns, passive equity and private equity have received almost all of the net inflow over the past 20 years. 

This matters because capital flows shape markets, and the markets have changed.

Passive funds allocate money according to index weights. The larger a company becomes, the more capital it receives. The more capital it receives, the easier it becomes for that company to remain large. This is not irrational. It is just mechanical. But mechanical does not mean harmless.

At the same time, active managers have also become increasingly focused on the largest companies. This is not because they are lazy or unintelligent, it is because incentives matter.

The incentive structure today points overwhelmingly toward large companies. Fund managers can deploy more capital in them. Brokers earn more from larger trades. Analysts have more clients to speak to when they cover them. Bankers earn larger fees from bigger companies and bigger deals.

Media attention follows market capitalisation. Research follows capital. Capital follows size.

The result is a market that appears diversified on the surface but is increasingly concentrated underneath.

The S&P 500 may still contain 500 companies, but 47% of its value sits in a small number of names. The top 15 companies represent a dramatically larger share of the index than they did when Buffett made his wager. That concentration did not happen because investors collectively abandoned diversification. It happened because passive flows, active incentives and market momentum all reinforced each other.

This creates a strange paradox. Passive investing originally worked because investors did not need to think too much - own a bit of everything, keep costs low and let the market do the work. But after nearly two decades of extraordinary success, many investors now own portfolios where a substantial portion of their savings is concentrated in a handful of companies.

Mathematically, the index is still diversified. Economically, the question is more complicated.

There is another side to this story. While public market capital has flowed toward the largest companies, private capital has grown rapidly and absorbed many smaller listed businesses. Private equity has become a powerful buyer of quality companies that might previously have remained public. Entrepreneurs have not stopped building businesses, but many keep them private for longer.

Being a small, listed company is hard. You receive less research coverage, less investor attention and less liquidity. If private capital offers an attractive exit, many founders and boards take it.

Every acquisition removes another opportunity from the public market. Every delisting makes the remaining market a little more concentrated. It happens gradually, so it is easy to miss. But over time, the opportunity set changes.

This is the great irony of the current market structure. The largest companies attract most of the passive capital. Active managers increasingly focus on those same companies. Private equity buys many of the smaller companies. So the majority of professional capital ends up competing over an increasingly narrow slice of the market.

And yet history tells us that the best returns often come from the opposite place.

Financial author Howard Marks has said that outstanding investing is not about buying good assets, but buying assets better than the market understands.

That distinction is everything.  Great companies are not always great investments. Microsoft was an outstanding business in 1999, but shareholders then endured a long period of disappointing returns. Apple has been one of the greatest corporate stories in history, but when was its last block-buster product? NVIDIA’s earnings growth has been extraordinary, but despite profit increasing 300% over the past two years, its share price is up less than 4% this year.

The question is whether owning more and more of the same wonderful businesses will continue to produce wonderful returns from today’s prices.

This is not a criticism of those companies. They deserve enormous admiration. But investing is not about admiration. It is about expectations.

A company already worth several trillion dollars can still create impressive value. Adding another trillion dollars of market capitalisation would be a remarkable corporate achievement. But for shareholders, the percentage return is much smaller. Size becomes gravity. Growth is still possible, but the arithmetic becomes more demanding.

That is why the next 20 years may not look like the last 20. The past era rewarded investors for buying the index, ignoring noise and letting the largest companies compound their income. That may still work. But investors should at least consider the possibility that the tailwinds which made that strategy so powerful have weakened.

Several risks now sit beneath the surface. While not all of these risks move on the same clock they are all very likely to occur, in my opinion, in the coming cycle. Some are political and could shift within an election cycle. Others are demographic arithmetic that has already been written and simply has not arrived yet.

The first is artificial intelligence. My concerns are well documented already but just put into context Chat GPT 1 contained 117 million parameters. Mythos, the latest and greatest, supposedly has 10 trillion.

The cost to train those models is only growing, yet the average person is still using the free version because it is good enough to summarise this thought piece. To me, the commercial question is whether customers will pay enough, at sufficient scale, to justify the capital being deployed.

This remains uncertain, least of all when you overlay the social cost of water usage, electricity usage and the impact it is having on employment expectations.

Open-source models may become good enough for many uses. Companies may prefer smaller private models for privacy and security reasons. Regulation may reshape what frontier models can do. The technology may be real and still fail to justify every valuation attached to it.

The second risk is demographics. For decades, the baby boomer generation was a powerful source of savings flowing into capital markets. As that generation moves deeper into retirement, the direction of flows will change. The rule of thumb in the US is that at age 73 you may begin to consume your savings, so between 2026 and 2032 we are going to see the baby boomers, who represent the largest portion of the US retirement market, start to consume, not contribute. Markets have benefited enormously from long-term inflows. Investors should not assume those flows are permanent.

The third risk is regulation. Throughout history, very large companies eventually become political targets. Governments tax them, fine them, regulate them or break them up. Sometimes they do so for good reasons. Sometimes they do so because large pools of profit are irresistible. Either way, the larger and more socially-important technology companies become, the more likely it is that governments will intervene. The FDA regulates life sciences, the FED/SEC regulates finance. It is hard to imagine a world where companies building frontier AI models remain lightly regulated forever.

The fourth risk is taxation. For years, many countries were willing to tax consumers and labour heavily, while allowing companies to benefit from globalisation, lower effective tax rates and favourable capital treatment. But if the largest companies employ a relatively small share of the workforce while capturing a very large share of profits and market value, the political bargain may shift.

Today the top 15 companies in the S&P 500 represent 47% of your savings but only employ 3% of the work force. Higher corporate taxes would reduce after-tax earnings and, all else being equal, valuations.

The fifth risk is government debt. Over the past 20 years, public debt has increased substantially across many developed economies. It is mathematically close to impossible  to believe that debt can continue growing at the same rate without consequences. Higher defence spending, ageing populations, infrastructure needs and geopolitical instability all require funding.

That makes it fanciful to imagine a simple return to the near-zero interest rate world that supported high asset valuations for so long.

None of these risks means markets must fall tomorrow. Markets rarely operate on our timetable. That is the point. The question is not whether the risks are obvious. The question is whether investors are being paid enough to take such risks. I would argue that markets have already received the bulk of the returns but new investors are facing the bulk of the risk.

I would politely suggest that the rules of the game have changed over the past 20 years and will be vastly different in the next 20. Passively following the crowd, when the crowd is just pouring money into the biggest companies, is not investing.

One test I like is this: imagine you had to make an investment today and could not change it for three years. Would that alter your decision? That is the capacity question from earlier, made concrete - not what you believe about the company, but whether you could actually survive by not touching the investment for three years.

That question also exposes the most expensive habit in investing: borrowing someone else's timeframe. Comparison quietly imports another person's capacity, willingness and horizon into your own decision, and none of those three things transfer. Someone else's 12 percent or 18 percent was earned against a different life, not yours.

To me, wealth is ultimately simple. It is having enough that you get to choose what you do with your time.

That is why my daughter’s comment stayed with me. “Dad, you often take a long time to get to the point.” She was right. But perhaps good investing often does take a long time to get to the point.

Investing is not a race. It is not about proving you are smarter, or luckier, than someone else. It is not about having the highest return to brag about at the next barbecue.

It is about building a life. It is about having enough to reach your own destination. And that journey is measured not against the market, but against your own goals.

Sometimes the long way to the point IS the point.

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Travel

David Colman - Lower Hutt - 21 July

David Colman - Palmerston North - 24 July

David Colman - Whanganui - 6 August

David Colman - New Plymouth - 7 August

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James Lee

Chairman

Chris Lee & Partners