The 'Innovation Dynamo' Is Driving Your Portfolio's Performance

Joel Litman

There's an ecosystem for innovation in the U.S. that just doesn't exist anywhere else...

This idea, which I'm calling the "innovation dynamo," is a major underpinning of the long-term U.S. bull market and Pax Americana – the next peaceful period of innovation and investment.

I've talked about at the Pentagon and at an FBI conference recently. It's helping us find great stock picks and understand the balance of global economic power.

And it's supporting the economic dominance of the U.S.

The mainstream media has been oblivious to this, touting a dubious and unsupportable narrative that the country lost its economic dominance years ago. According to this thinking, China's economy is the ascendant power and will soon surpass America's.

Last December, I explained why the data doesn't support that story.

Like angel investing, venture capital in the U.S. is greater than in the rest of the world combined. It has been that way for more than 40 years.

The same goes for domestic market capitalization. Last year, U.S. companies made up 65% of the total global market value. And the Uniform economic earnings of corporate America are more than double that of all other companies in the world.

Take a look at the S&P 500 over the past 30-plus years. None of the top 20 largest U.S. companies back then hold that same distinction today.

In other words, since 1990, Facebook – now called Meta Platforms (META) – Apple (AAPL), and Amazon (AMZN) have supplanted General Electric (GE), ExxonMobil (XOM), and IBM (IBM)... a testament to our economic vitality.

Chalk that up to our unique emphasis on entrepreneurship...

Nearly half of all domestic megacap companies were tiny little microcaps only a few decades ago (if they existed at all).

That doesn't happen in the rest of the world. In most other countries, the same monopolistic companies that reign today were reigning decades ago... and will continue to dominate for decades to come.

Take South Korea. Forty years ago, Samsung was the country's largest company. And it hasn't lost its top spot. Today, Samsung's market cap is 215% higher than the No. 2 company, LG Energy Solution.

That's bad. Monopolies just don't innovate the way entrepreneurs do. Of all the research and development invested by U.S. companies, 82% comes from those that were or still are backed by venture capital.

That virtuous cycle unlocks massive shareholder value. It also creates jobs and fulfills customer needs in ever-improving ways.

Entrepreneurs and business leaders succeed, get wealthy, and then turn into investors themselves. Countless universities across the U.S. sponsor startup contests in which students pitch their ideas to real investors. That's unheard of in most other countries.

We instill this idea of entrepreneurship from a very young age. In a lot of places, the idea of an 8-year-old selling drinks on the side of the road for fun is borderline crazy. And yet, lemonade stands are almost a rite of passage here in the U.S.

The innovation dynamo is rooted in U.S. liberties...

And it attracts foreigners to the U.S. ecosystem.

The Constitution and the Bill of Rights ensure due process and the right to private property. In other words, the government can't just walk up and take your stuff.

That's in contrast with so many parts of the world, where the government – or a friend of the government's – can legally take your assets and your company, restrict what you do with your money, and limit your speech.

For all of the societal problems in the U.S. today, many entrepreneurs would prefer to start their companies here... where they can also enjoy the fruits of their labors.

That's why legendary investor Warren Buffett likes to say, "Never bet against America." The very foundations that support and encourage our personal freedoms are also necessary for freedom of innovation.

Innovation means good things for the market...

And this information opens up countless opportunities for investors to make outsized returns. This year, the market value of U.S. equities surpassed that of the rest of the world's companies combined. Lots of individual stocks reached new highs along the way.

That doesn't mean the market won't have its ups and downs. We as investors will always have to contend with corrections, pullbacks, and bear markets.

But despite near-term volatility, the U.S. stock market has a strong foundation. Current prices reflect only investor fears, not a crippling market weakness.

This year's market conditions are an opportunity, not a warning. Stay the course... and don't abandon your portfolio.

Wishing you love, joy, and peace,

Joel
September 16, 2022

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