We want to take a trip halfway around the world to South Korea, because we believe what is happening there could provide valuable insight into what may lie ahead for the United States.
A market dominated by just two companies.
South Korea's stock market has become one of the most concentrated markets in the world. Two companies, Samsung Electronics and SK Hynix, have grown so large that they now represent more than half of the value of the country's main stock index, the KOSPI.
Think about that for a moment.
When Samsung has a great day, the entire South Korean market often rallies. When Samsung or SK Hynix disappoint investors, the entire market can fall sharply, even if hundreds of other companies are doing just fine.
In other words, the market's direction is increasingly being determined by only two companies.
That has created tremendous wealth during the AI boom, but it has also created tremendous volatility. As AI enthusiasm grows, billions of dollars flow into those same companies. When investors become nervous, billions of dollars flow back out just as quickly. The result is a market that can experience significant swings based on only a handful of earnings reports or changes in investor sentiment.
Sound familiar?
As we studied what is happening in South Korea, we couldn't help but think about our own stock market.
While the United States is much larger and more diversified, we are beginning to see many of the same characteristics. Today, a relatively small group of companies is responsible for an enormous portion of the gains in the S&P 500 and Nasdaq.
Those companies include Nvidia, Microsoft, Apple, Amazon, Alphabet, Meta Platforms, Broadcom, Tesla, Berkshire Hathaway, and JPMorgan Chase.
Collectively, these companies now account for a substantial share of the total value of the U.S. stock market. When several of them move in the same direction, they often pull the entire market with them.
This concentration isn't necessarily a bad thing. Many of these companies are among the most profitable businesses ever created, with tremendous balance sheets and the financial resources to invest hundreds of billions of dollars into artificial intelligence, cloud computing, and next-generation technologies.
The question investors should ask is not whether these companies are great businesses. They clearly are. The question is: what happens if expectations become too high?
The AI arms race.
Today, we are witnessing one of the largest capital spending cycles in history.
Microsoft, Amazon, Meta, and Alphabet are collectively investing hundreds of billions of dollars building AI infrastructure. That money flows directly to companies like Nvidia, Broadcom, Micron, TSMC, Samsung, SK Hynix, and ASML. Then it flows into data centers, networking equipment, electrical infrastructure, power generation, cooling systems, and construction companies across the globe.
This creates an incredible growth engine. But it also creates concentration.
If AI spending continues at today's pace, these companies may continue producing outstanding results for years. If spending slows or investors begin questioning future returns, however, the market could react quickly, because so much of today's valuation depends on continued AI growth.
Should investors be worried?
Not necessarily.
History has shown us that transformative technologies often create market leaders. The railroad. Electricity. Automobiles. The internet. Now artificial intelligence. The companies leading these revolutions frequently become some of the most valuable businesses in the world.
The key is understanding that even great companies experience corrections. During every major technological revolution, markets periodically become overly optimistic before resetting expectations. That's normal.
Long-term investors shouldn't fear volatility. They should prepare for it.
How do we protect ourselves?
One of the biggest mistakes investors make is confusing concentration with diversification. Owning several technology stocks is not true diversification if they all depend on the same AI investment cycle.
Instead, we believe investors should consider building portfolios that can weather multiple economic environments. That may include maintaining exposure to high-quality technology companies, dividend-paying businesses with durable cash flows, healthcare, financial services, industrial companies, energy and utilities, cash reserves for future opportunities, and high-quality fixed income, depending on income needs and time horizon.
Having some liquidity available can be incredibly valuable during periods of market stress. History has repeatedly shown that investors with available capital are often in the best position to take advantage of attractive opportunities when others are forced to sell.
Market corrections are never enjoyable, but they have also been responsible for creating some of the greatest long-term buying opportunities in history.
Where does real estate fit into all of this?
As many of you know, real estate remains one of my favorite long-term wealth-building tools. However, real estate is not immune to what happens in the financial markets.
Large stock market corrections can impact consumer confidence, retirement account balances, bank lending standards, commercial financing, and investor psychology.
When investors feel less wealthy, they often become more cautious. Lenders may tighten underwriting. Commercial transaction volume may slow. Cap rates can expand if financing becomes more expensive or risk premiums rise.
Yet these periods also tend to create opportunities. Investors with strong balance sheets, available cash, and long-term financing often find some of the best acquisitions during times of uncertainty. We've seen this repeatedly throughout history. Those who remain patient, disciplined, and well-capitalized are often rewarded when markets eventually stabilize.
We don't believe the AI revolution is ending. In many ways, we think we're still in the early innings.
But we also believe we're entering a phase where investors need to become increasingly selective. The biggest risk today isn't necessarily that AI fails. The bigger risk may be that expectations have become so high that even excellent companies struggle to exceed them.
That's exactly why we find South Korea so fascinating. Their market serves as a real-world example of what can happen when an index becomes heavily dependent on just a few companies. The United States isn't there yet, but we're certainly moving in that direction.
As investors, our job isn't to predict every correction. Our job is to build portfolios that can participate in long-term growth while remaining resilient during inevitable periods of volatility.
If we stay diversified, maintain discipline, avoid emotional decisions, and continue focusing on long-term fundamentals, we'll put ourselves in the best position to benefit from whatever the next chapter of this AI revolution brings.
