This Always Happens Before a Stock Market Crash

The stock market just hit another record high, so everything looks perfectly calm and rosy. But underneath all of that, something genuinely frightening is building right now. There are just 30 companies, guys, that's only 6% of the S&P 500 that control more than half of its entire value. Think about that for one second. If just a few of those giants crack, they could drag down the whole market into a brutal bear market, even if the other 470 companies don't fall at all. And this exact setup has happened before in history, and it ended in disaster. And Michael Burry, the guy from the big short, just put out a warning that stocks could go 15 to 20 years with little or no real gains. So today, we are going down the rabbit hole to see just how fragile this market really is. So let me show you the number that honestly stopped me in my tracks this week. The S&P 500, which is America's 500 largest companies, recently closed at about 7,659 points. Now, here's the shocking part. Roughly 4,300 of those points come from just 30 companies. To put a face on it, NVIDIA alone accounts for roughly 600 of those points, one single company worth more inside this index than hundreds of the others combined. Guys, NVIDIA worth $600. When we hit the low in March of 2009, the S&P hit $666. So basically 10% larger than NVIDIA is today. So when the headlines cheer a shiny new record high, what they're really cheering is a handful of companies doing incredibly well, not the market as a whole. And the other 470 companies, that's 94% of the list, almost every single business you can think of. And together, they only add up to about 3,360 points. So when you picture the S&P 500 as 500 companies all working together, that's just not really true. It has become a tiny handful of giants. And then there's everybody else. So let's go really deep and figure out exactly what's giving this market its value? And just as importantly, what isn't? First, you have to understand how the S&P 500 actually works, because it's the key to this entire story. It is not an equal weighted club where every company counts the same. It's weighted by size, meaning the bigger the company, the more it counts towards the S&P index. So a 1% move in a giant like NVIDIA pushes the whole index hundreds of times more than a 1% move in a small company. The big ones basically run the show. It's a bit like tug of war where a handful of players are the size of elephants and everyone else is a toddler. The elephants decide which way the rope moves, no matter how hard the little ones are going to pull. So who are these giants? Let's start right at the very top. NVIDIA, the AI chip king, all by itself, makes up almost 8% of the entire S&P 500. Guys, one single company, 8% of the entire index. Apple, right behind it at 7.5%. Microsoft, tack on another 6%. Just those three companies, NVIDIA, Apple, Microsoft, make up over 21% of the whole index. Add the next few, Google, Amazon, Broadcom, Meta, and now the top seven companies alone make up about 35% of the index. Stretch it to the top 10, adding names like Tesla, Eli Lilly, and Berkshire Hathaway, and you're already approaching 40% of the entire index in just 10 companies. Keep going out to the top 20 and you cross a jaw-dropping line. Just 20 companies, about 4% of the entire list, make up over half of the entire S&P 500 and the top 30 together are around 56%. And here's the pattern you can't unsee once you spot it. Almost every one of those giants is a tech or AI company. Nvidia, Apple, Microsoft, Google, Amazon, Broadcom, and Meta, plus a long line of chip names like Micron, AMD, Intel, Palantir, Lam Research, and Applied Materials. Sprinkle in a few non-tech giants like Eli Lilly, Berkshire Hathaway, JP Morgan, Exxon, Visa, and Walmart, and that's basically your entire top 30. Round out the list, and you're going to spot some familiar names like Johnson & Johnson, MasterCard, Costco, Procter & Gamble, and Coca-Cola. each one of these is a household name and giant but each one is now just a tiny slice of the pie next to the tech leaders up top the gap is huge guys nvidia single slice is bigger than coca-cola Merck and Costco combined now guys at this current point in time not over history i'm saying at the current point in time if you think you're getting massive diversification from the S&P 500 you're getting diversification but I want you to remember that as of right now every dollar you add to the S&P the vast majority of your money is going to a small group of AI and tech companies and that's okay because the habit we're trying to form over the long haul will diversify you appropriately yes you think you own 500 companies spread out nice and evenly you're not in reality more than half your money is riding out on about 30 of them and a huge chunk of that is riding on the AI boom simply continuing. Now, that doesn't mean it's a bad thing in and of itself. These are some of the most profitable companies in all of history, but it's wildly different from what most people believe they're actually buying. This is the real heart of what's giving the market its value. It's not spread evenly across 500 companies. It's a mountain of value piled onto a few AI and tech winners with a much flatter landscape stretching out beneath them. The worry is that so much is now riding on them staying perfect, and price for perfection is a dangerous place to be because perfect is really, really difficult to keep up. Now, here's where it gets truly unsettling. This year, the S&P 500 is up about 14%, which sounds fantastic, right? But peek under the hood and the picture changes completely. More than 40% of the companies inside the index are actually down for the year. And the typical middle of the pack stock, it's up only about 4%. So how on earth is the index up 14% when most of its own stocks are barely moving or even falling? Simple. Those few giants at the top are doing all the heavy lifting. And because they count for so much, they're dragging the whole average up with them. It creates a dangerous illusion. The scoreboard flashes, everything's great, while a huge portion of the market is already struggling beneath the surface. So let's ask the scary question head on. What actually happens to your money if those top 30 giants fall? Let's run a simple stress test. Imagine those 30 companies drop 35%, but every single one of the other 470 stays perfectly flat, not falling one penny. What happens to the S&P 500? guys, it would still be down about 20%, 19.6% to be exact. That's almost a full bear market triggered by just 6% of the companies while everyone else stays completely still and flat. That is the raw scary power of this concentration. And we can keep playing it out. If those 30 fell 20%, the index drops about 11%. Guys, if they fell 50%, the index plunges 28%. And if the Giants fall 50%, while the rest of the market slips just 10% along with them, you're suddenly looking at a 32% market crash. Those numbers show how a problem in one small group of stocks could rattle nearly everyone's retirement account all at once. Because here's the uncomfortable truth. Whether you handpicked those stocks or not, if you own a plain S&P 500 index fund, you already own all 30 of them in a big way. It's your money. your retirement, your future, all tied to the same 30 names. And most people have no idea it's even happening. But now, let me be completely fair and honest with you because this really does cut both ways. This is merely a math model. It is not a prediction. And those 30 companies do not all face the same dangers. For every one of them to crash at the same time, you'd need something far bigger than just AI fears. Think about it. Nvidia, Walmart, Coca-Cola, Johnson & Johnson and Exxon are wildly different businesses. A bad day for AI chips doesn't suddenly stop people from buying groceries or soda or medicine. So a true collapse of all 30 all at once would take a massive everything everywhere shock, which is possible, but it's far from guaranteed. The point here is not to predict doom. It's to understand just how fragile a top heavy market can be. Now here's the part that should really grab your attention because we've seen this exact movie before. Rewind to the late 1960s and early 1970s. Back then, Wall Street fell head over heels for a group of about 50 beloved companies nicknamed the Nifty 50. These were the absolute superstars of their day. Household names like Polaroid, Kodak, Xerox, Disney. And just like today, they were a small group of darlings towered over the entire market. And investors told themselves a very dangerous story. These companies were so wonderful and so unstoppable that it simply didn't matter what price you paid for them. Just buy them and hold them forever. That's what everyone said back then. Does that sound familiar? So people paid absolutely insane prices, sometimes 50, 80, even 90 times their yearly earnings for these so-called Sure things. Then reality came crashing in. In the brutal bear market of 73 and 74, the Nifty 50 didn't just dip, they got demolished. Polaroid, one of the most beloved stocks in all of America and a tech leader at the time, crashed around 90%. 90% from a safe, world-class company. But here's the big lesson, and please do not miss this one. The problem wasn't that these were bad businesses. Many of them were genuinely great and lasted decades and decades. The problem was the price. Investors paid so much that even excellent companies became terrible investments, and the damage was slow to heal. Some of those unbeatable names like Kodak and Xerox never truly got back to their old glory, and people who overpaid waited a decade or more just to get back to even. A few, like Coca-Cola, really were great businesses and still are today. They eventually grew into their sky-high prices, but even then, buyers lost years waiting. The price you pay decides how long and how painful the ride will be. Owning a few big names didn't cause the pain. Overpaying did. And that's the exact same trap staring at investors today. History doesn't repeat itself perfectly, but it sure does rhyme. The faces change. back then it was camera and copiers. Today it's chips and AI, but the human mistake is always the same. Falling in love with a company and forgetting to change the price is a recipe for losing a lot of money. And guys, it's not just me pointing at this history. Michael Burry, the investor made famous in The Big Short for calling the 2008 housing crash, just wrote about this exact era. And he told a story that I really loved. Back in 1980, Burry was nine years old. KISS was his favorite band, and he used to read the stock tables in the back of the newspaper sports section, right next to his sport news. The first stock that caught his eye was American Motors, the company that owned Jeep. He watched it climb. He got excited, and he brought it up to his dad, and his dad sternly told him, nobody ever made money in stocks. Now, that sounds crazy today, but think about where his dad was standing. from 1966 to 1982. Basically from the time his dad was 18 years old to 34. The S&P 500 after inflation fell about 53%. His dad's entire adult life, stocks had gone nowhere. So to him, that was a true statement. You don't make money in stocks. And here's the part that should make you sit up. That wasn't the only time. Burry points out that from 1929 to 1949, through the Great Depression, stocks fell about 58% after inflation. And from the top in 2000 all the way to 2011 and 12, they fell about 40% after inflation. Three times in the last 100 years, stock prices went basically nowhere for 10, 15, even 20 years. And when you factor in inflation, they were down significantly. Now, let me be fair here because Burry is fair about it too. Those numbers do leave out dividends. And back then, dividends were a major portion of stock returns. So if you reinvest your dividends, the 1966 to 1982 loss shrinks to about 10%. The 2000 to 2011 loss shrinks to about 25%. And if you reinvested starting in 1929, You were actually ahead by 1949 with dividends. So it wasn't a wipeout for the patient investor, but it was a very, very long wait. And that's the lesson Burry says people have forgotten. Today, the mantra is stocks only go up and buy the dip. But Burry thinks speculation has taken over investing and that the market looks stretched. And he's warning that another 15 to 20 year stretch of little or no real returns could be coming. Remember, real returns is after inflation. That's his opinion, not a guarantee. But it's worth hearing from one of the most famous bear market investors in the world. And guys, my guess is if you ask a lot of value investors out there, they will say that the next 10 or 15 years are not going to be pretty. We say it on our channel all the time. The next 10 or 15 years will look nothing like the last 10 or 15 years in all likelihood. So connect the dots. Remember the Nifty 50, that crash happened right in the middle of Burry's dad's lost era. People overpaid for great companies and then they waited and waited and waited. The price you pay doesn't just decide your future return. It also decides how long you might have to wait for it. So here's the thing I really need you to take away from all of this. The real danger today is the very same one that sank the Nifty Fifty paying too high a price, a wonderful company, but at a crazy price can still be a terrible investment. And this is exactly where principle driven investing saves you. It is built on five simple rules. Number one, we are investors, not speculators. Number two, every investment return is the present value of all its future cash flows. Number three, if we don't understand it, we don't invest in it. Number four, in the short run, the stock market's a voting machine. In the long run, it is a weighing machine. And number five, and the most important one, especially for this video, a great story becomes a bad investment if you pay the wrong price. That last rule, one more time, it's the entire story of the Nifty Fifty. It's the entire story of the dot-com era. It's the entire story of the Great Depression and maybe the story of today. With these rules, you just focus on what a business is truly worth and refuse to overpay for it. Do that, and honestly, it doesn't matter how top-heavy the market gets. You're protected by the price that you've paid. That is the quiet superpower here. While everyone else is nervously guessing whether the top is finally in, a patient investor just keeps calmly asking one question about any stock they want to buy. Is the price I'm paying today a good deal for all the cash that I expect this business will produce down the road? If yes, you buy. If no, you wait. And guys, if you buy, you got to remember, doesn't mean that the stock won't become cheaper. Then you have to evaluate again and say, do you want to buy more? It may be boring. It could be stressful, but it works. The five tenets aren't about predicting the future. They're about never putting yourself in a spot where you need to. Now, guys, I have a special PDF offer for you, absolutely free. We have our deep dive on principle-driven investing in today's market and a recap of this entire video all in a free PDF. In addition, it'll teach you exactly how to use dollar cost averaging. So if you'd like that absolutely free PDF to help you along your journey, click the link in the description below. Again, absolutely free. In a matter of seconds, you can download it. Now, I don't want you walking away from this terrified and dumping all of your stocks because that's usually a huge mistake. Hell, you might be sitting here going, well, then why am I dollar cost averaging the S&P if it's so top heavy? Legitimate question. So let me share the single most powerful stress-free tool that regular investors have, the true story about dollar cost averaging. You're hearing what I'm talking about and saying, well, Paul, if I shouldn't buy the S&P because it's so top heavy, why even dollar cost average? Let me explain. Guys, the example I always like to bring up is the NASDAQ. If you started buying the NASDAQ on March 10th of 2000, you bought it at its peak back then. And you watched it fall 80% from its high to its low in 2003. If I had told you that, you'd be like, I'm not investing in that. But here's what's amazing. If you dollar cost average from back then all the way down till today, you made an annualized 15% return on your money. Even if the NASDAQ falls 50 or 60% today, you're well into the double digits. That is the power of dollar cost averaging. Same with the S&P. If you did it back then in March of 2000 to today, your returns were well over 13% returns annualized. Even if it falls in half, it's still double-digit returns. We're teaching here that dollar-cost averaging is not to care. It's, but we provide this video to prepare you emotionally for the future. Because if you're not prepared emotionally, you are going to make mistakes along the way. If you understand that you can still make a lot of money watching the market fall 80%, you are less likely to make an irrational and emotional decision when the market is falling. The key here is buying an index fund of good companies. I'm not telling you to buy the semiconductor index fund. I'm telling you the NASDAQ 100, the S&P 500. These are the ones that we have looked at and said, wow, if you literally started at the worst possible time at the very peak, you still did very, very well over that time. You just emotionally had to be ready to watch your money fall and continue to do so as time went on. Now, like we saw with Burry, eventually can sometimes mean 15 or 20 years. But in those long, flat stretches, dollar cost averaging is exactly what kept people buying cheap shares the whole way through and collecting those dividends along the way. That's why most of the people who got wealthy over the last 50 years weren't geniuses who called every top and bottom. They were ordinary folks who simply kept buying month after month after month and never stopped. Now, guys, you probably thought, but would I have the worst luck in the world and buy right at the crash? As I explained to you the analogy of the S&P and the NASDAQ at the very top, it does not matter as long as you dollar cost average along the way. And for those of you who think, well, Paul, what if stocks go to zero? Never stop dollar cost averaging because if stocks go to zero, the entire economy and your entire bankroll will not matter at all. So you might as well be spending the money buying stocks. That's the whole beauty of dollar cost averaging. It turns the one thing that everyone fears, a crash, into the very thing that makes you wealthy, as long as you simply keep on going. The only catch is discipline. That's why we created this channel. We want to be the voice of reason and discipline when those things happen. Because guys, at the end of the day, it is stressful to see your money fall. It will cause you to panic, but you need to have the sound advice and the sound words telling you that it will be okay. The real battle investing usually isn't about being some kind of financial genius. It's about controlling your emotions while everyone else is losing theirs. Now, guys, our friendly reminder, never take our title and thumbnail literally. We are never here to give a stock tip. We're here to teach a process that you can one day take and apply to your own investments that'll help you sleep better at night and probably make better emotional decisions. So now here's the question that should be bugging you right now. You just watched me split the S&P 500 into 30 giants and 470 everybody else's. You saw the math, but when you pull up Nvidia or Apple or Microsoft on your own screen tonight, can you tell me if today's price is good deal or bad deal? I'm not talking about the story, guys. I'm talking about the price versus the value. Well, don't feel bad if you can't. The vast, vast majority of people can't. Guys, even some of the biggest wealth managers I know can't do it. So it's not a knock on you. Nobody ever taught us how to do it. So what do we end up doing? We end up doing exactly what the Nifty 50 buyers do. We buy the story and hope the price works out. And that's exactly why I built Everything Money and our stock analyzer tool. I put it so that you can put your own assumptions in. How fast do you think the company is going to grow its revenue? What kind of profit margins can it keep? And you have all the historical data to go off of to help guide you along the way. But once you hit that analyze button, it's going to hand you back two very important things. One, the return you'd get if you bought the stock at today's price. And two, what's the price you need to pay in order to get the return you actually want? That's it. It doesn't care where the market's going to go next month, next week, next year. Just the price versus the value right in front of you. Guys, we've all been that person who look at a stock ticker price and at some point goes, yeah, but what does that mean? This is what tells you what it means. This answers that very important question. And guys, in our community, you get everything. The stock analyzer tool. The dozen or so tools I haven't even discussed are exclusive content and are exclusive live streams. How much is it worth to you to have all the tools you need for success and the community around you to help you with the emotional part to make you even more successful. But for $7 for seven days, you can go sign up and try out this tool. The link is right down below. And if you want to see this exact concentration risk that I was talking about play out in real time, go watch the video that we dropped about how the AI trade appears to suddenly be unraveling and it's hitting some of the very same giants right now. So click the video right here on your screen. Thank you for your time.