The Top Three And The Tundra

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I used to think the stock market was mostly a price-discovery mechanism with some noise around the edges. I no longer think that. I think it is mostly a forced-buying mechanism with some price discovery around the edges, and the ratio has been shifting toward force for twenty-five years. This post is about the math behind that shift, the uncomfortable conclusion that follows from the math, and the strategy I've landed on — which is almost embarrassingly simple, and involves a 2006 pickup truck with 360,000 miles on it.

I'll name the conclusion up front, because you should know where this is going:

1. Cap-weighted passive index flows now dominate price formation in the S&P 500. Not exclusively, but structurally. The top three to seven names in the index receive a disproportionate share of that flow because market-cap weighting sends ~30% of every indexed dollar to those few stocks.
2. You can play the mechanism. Twenty years of backtesting shows that the simple discipline of DCA-ing into the top 3 names by market cap, rebalancing the roster maybe once every year or two, and never selling, returns roughly 60% more terminal wealth than the same DCA into the full S&P 500. That's not a stock-picking claim. It is an expression of the flow math.
3. The mechanism compounds through dollar debasement. M2 money supply has grown ~3.3× since 2006 while CPI grew ~1.6×. The gap between those two numbers is asset-price inflation — printed dollars that didn't chase consumer goods went somewhere, and that somewhere is disproportionately the top of the equity cap distribution.
4. This is a rigged game. Not because anyone is cheating, but because the structure of retirement saving, passive indexing, and monetary expansion all push in the same direction — toward a handful of dominant corporate entities whose valuations are increasingly detached from any fundamental mechanism that used to discipline them.
5. My response is to play the game with a fixed slice of my capital, while hedging everything else with things that don't depend on the game continuing. Those hedges aren't Bitcoin or gold. They are my operating businesses, a low and durable personal-expense base, practical skills, and confidence in my ability to earn money in whatever the New Dollar™ turns out to be.

If any of that is interesting, keep reading. If you want the operational recipe at the end, skip to the last section. The math in the middle is the whole point, though.

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The Forced Buy

There is a specific number that, once you see it, changes how you look at markets: approximately 50% of US equity market capitalization is now held by passive-mandate vehicles. Index funds, target-date funds, 401(k) default allocations, robo-advisors, pension funds with mandated index exposure. In 2000 that number was around 3%. Today it is approximately half.

Those half of all dollars are, by mandate, not price-sensitive. An index fund that holds the S&P 500 is required to hold Apple. It cannot say "Apple is expensive, we'll pass this month." Its mandate is to track the index at its current market-cap weight. When a new dollar enters the fund, that dollar is automatically allocated according to the market caps of the index members. When a dollar leaves, the reverse.

The top seven stocks in the S&P 500 — colloquially the Mag 7 — represent approximately 30% of the index's total market capitalization as of this writing. That means ~30% of every dollar that flows into a cap-weighted S&P 500 fund is allocated to just seven stocks. Given that passive holds roughly half the market, approximately 15% of all S&P 500 dollar flow is non-price-seeking forced buying of seven companies.

This is not a conspiracy. It is not even a controversy. It is the advertised mechanism. Vanguard and BlackRock are doing exactly what they promise their customers they will do — track the index at minimum cost. The structure is the point. The customers chose this structure because it is cheaper than active management and historically has outperformed most active managers. The system is working as designed.

The fact that it is working as designed is what makes it so structurally unfair to anyone standing outside of it.

The Feedback Loop

Market-cap weighting creates a direct feedback loop between past price movements and future flow allocations. If Apple outperformed Microsoft last year, Apple's weight in the index goes up, so Apple receives a larger share of next year's passive flow, so Apple's price gets pushed up more than it would have on fundamentals alone. The larger the passive share of flow, the stronger this loop becomes. In 2000 the loop was weak because active investors could easily arbitrage any mispricing. In 2026 the loop is strong because 50% of flow is running the loop and only 50% is price-seeking.

I wrote a post a while back called The Strange Attractor, arguing this was happening and that it would produce a metastable market in which price discovery was impaired and the top of the distribution pulled farther and farther from the middle. At the time I was reasoning from principles. I hadn't yet done the quantitative work to confirm it.

Then I did the quantitative work. Here is what I found.

The Backtest

Over the twenty years from January 2006 to April 2026, if you had DCA'd $1,000 per month into a rotating-roster basket of the top seven names by market cap — replacing the roster when membership actually changed, which happened roughly every one to three years — and never sold, your $244,000 of contributions would today be worth approximately $1,240,000. That's a terminal multiple of 5.1× on contributed capital.

The same $1,000 per month into SPY, the plain-vanilla cap-weighted S&P 500 ETF, would today be worth approximately $1,030,000. A 4.2× multiple.

That's a delta of about $200,000 over twenty years, for the same dollars, the same discipline, and arguably less emotional demand — the top-7 DCA basket had a smaller maximum drawdown than SPY itself, because the diversification of monthly contributions smoothed the entry prices.

I was surprised. I expected the top-7 to win, but I expected it to win with more pain.

Then I asked: is seven the right number? What happens if I tighten?

• SP1 — buy only whoever is #1 each month — returned 5.9×.
• SP2 — 5.3×.
• SP3 — 6.7× — the winner.
• SP4 — 6.2×.
• SP7 — 5.1×.
• SP10 — 4.9×.

The curve is not monotonic. SP3 beats everything. It also has a smaller maximum drawdown than SP4 or SP7. It is structurally the cleanest expression of the mechanism — tight enough to capture the top of the forced-flow allocation, loose enough to ride out single-name weirdness when the #1 slot rotates.

I've changed my mental model. I used to think of this as an SP7 strategy. It is an SP3 strategy.

The Structural Test

The backtest number by itself isn't proof that the mechanism is responsible for the outperformance. Maybe the 2010s tech boom would have happened anyway. Maybe 2006-2026 was a weird period and the forward performance will revert. Those objections needed to be tested.

I ran three tests.

Test 1: split the period in half. If the mechanism is real, outperformance should be larger in the second decade than the first, because the passive AUM share grew from ~10% to ~30% in 2006-2015, and from ~30% to ~50% in 2016-2026.

Result: in the first decade, SP7 lost to SPY by 32 percentage points of return on capital. The 2006-era top-7 was Citi, Bank of America, GE, Exxon — names that got destroyed in the financial crisis while the broader index recovered better. The mechanism wasn't strong enough to rescue them.

In the second decade, SP7 beat SPY by 118 percentage points. A 150-point swing. The mechanism turned on when passive share crossed roughly a third of the market. The outperformance post-2016 is not tech boom; it is structural flow concentration.

Test 2: test the inverse. If cap-weighted flow concentrates into mega-caps, the mirror should be that small-caps and equal-weighted indices systematically underperform, because the same flow that feeds the top starves the bottom.

Result, same DCA method, same dollars:

• SP7 (top-7): $1,240,000
• SPY (cap-weighted 500): $1,030,000
• RSP (equal-weighted 500): $847,000
• IJR (S&P SmallCap 600): $742,000
• IWM (Russell 2000): $677,000

Monotonic. Exactly what the mechanism predicts. The equal-weighted index — which deliberately fights cap-weighted flow by giving every member the same allocation regardless of size — underperforms the cap-weighted version of the same 500 companies by nearly 20%. Small-caps underperform by more. The further you go from the forced-flow concentration, the more you pay.

Test 3: the sweet-spot scan. Covered above — SP3 peaks at 6.7×. Names 8 through 10 add essentially no return. Names below 4 introduce single-name-rotation whipsaw.

The three tests point in the same direction. The mechanism is real, it has accelerated as passive share grew, and tight concentration at the top (3 to 4 names) captures the pure signal. There is no plausible fundamental explanation for an equal-weighted index of the same 500 companies underperforming the cap-weighted version by 20% on identical DCA — that is a flow signature, not a fundamentals signature.

The Debasement Stack

Everything above is the passive-flow thesis. There is a second mechanism running in parallel, and it compounds with the first.

Since 2006, the US money supply measured by M2 has grown from roughly $6.7 trillion to roughly $22.1 trillion. That is 228% growth, or about 5.8% per year compounded. Over the same period, CPI grew about 64%, or 2.5% per year. The gap between these — roughly 147 percentage points of nominal growth — is the debasement that did not show up in the grocery aisle.

Where did those printed dollars go? They went to asset prices. Houses, equities, private businesses, collectibles, crypto, private equity. Not all at once, not evenly, not fairly. But they went to assets, because holders of cash lose purchasing power at 5–6% per year and must escape into something.

The largest single absorption vessel is residential real estate. The second largest is equities, mostly held via passive vehicles. So the debased-dollar flow gets funneled through the same pipe that concentrates into cap-weighted indices. The top of the cap distribution receives a second impulse — not just its share of passive flow, but its share of the new debased dollars passing through the retirement system.

When I adjust the twenty-year backtest into real terms, the picture gets sharper. In 2006 consumer purchasing-power, SP3 DCA returned about $1.0 million (nominal $1.64M deflated by CPI). SPY returned about $630,000. Cash under a mattress returned about $150,000 — you lost about 40% of your purchasing power by sitting still.

When I adjust into M2-share terms — "what fraction of the nation's money supply do you own?" — the picture is brutal. In 2006 money-share units:

• SP3 DCA: final share of US M2 grew by +116% over the twenty years
• SPY DCA: grew by +36%
• Cash: shrank by 68%

The cash saver did not merely lose purchasing power against a grocery basket. They lost two-thirds of their share of the nation's money. That is the real measurement of wealth erosion in a debasing regime. The diligent SP3 contributor more than doubled their share of the nation while the diligent cash saver lost most of theirs. Same $1,000 per month, opposite outcomes in share of the economy.

The Political Problem

Now for the uncomfortable part.

The mechanism above is not self-correcting. Every feedback loop I described runs one way. Passive flow concentration feeds more passive flow. Debasement feeds more asset-price inflation, which feeds more demand for wealth-preservation vehicles, which feeds more passive flow. Demographic decumulation, which I initially thought might reverse the flow, probably won't — the wealthy elderly own 89% of directly-held equities and do not meaningfully decumulate. Their RMDs get reinvested; step-up basis on death wipes capital gains; generational transfer preserves concentration. The mechanism is demographically resilient.

The mechanism is also monetarily resilient. As long as M2 continues expanding, debased dollars keep looking for a home, and the cap-weighted top of the equity distribution is the default home. This will continue until something breaks the monetary regime itself — a reserve currency change, a hard-money alternative gaining serious adoption, or central bank digital currency with capital controls.

What the mechanism is not resilient to is political intervention. When wealth concentration becomes visible enough, and measurable enough, and politically salient enough, the response is policy. Antitrust breakups. Wealth taxes. Changes to 401(k) and IRA tax treatment. Caps on passive fund concentration in individual names. Forced divestiture. Mark-to-market taxation on unrealized gains above a threshold. Any of these, individually, would reduce the flow pressure. Several of them together would break it.

None of these is imminent. All of them are in some stage of serious policy discussion. My best guess — and it is a guess — is that the political response to passive-flow concentration arrives in pieces over the next 5 to 15 years. The Tier 1 indicators to watch are passive AUM share growth (is it still accelerating?), top-10 market-cap concentration in the S&P 500 (currently ~35%, watch for 40%+), and the Mag 7 P/E premium over the rest of the market (currently about 1.5×, watch for widening).

Long before the formal policy response arrives, there will be political violence in the rhetorical sense — a steady increase in political movements, on both the populist left and the populist right, that target the asset-holding class in general and the mega-cap-concentrated portion in particular. That rhetoric is already audible. It will get louder.

When the policy response arrives, the mechanism runs in reverse. Every structural force that compounded the concentration — passive flow, debasement, demographic resilience — becomes symmetrical on the way down. The same seven or three stocks that got the disproportionate forced-buy get the disproportionate forced-sell. Drawdowns in that scenario would make 2008 look quaint. Concentration risk, which is obscured by the structural tailwind today, becomes brutal and visible within a few quarters.

So the strategy has an expiration date. The date is unknown. It is probably somewhere between 5 and 20 years out. It is not tomorrow, and it is not in 50 years.

So Why Am I Still Going To Play

Because the alternative is worse.

If the mechanism continues — and it probably continues for years more — sitting out means accepting the slow grinding erosion of wealth-share. The cash holder who lost 68% of their M2-share over the last twenty years did not do anything wrong by any individual measure. They were prudent, they saved diligently, they avoided reckless bets. They lost two-thirds of their relative position in the economy anyway, because the game was rigged in a direction that punished prudence and rewarded participation in the forced-flow mechanism.

I am not willing to take that outcome for the portion of my capital that I do not have the bandwidth to manage actively. That portion needs to be somewhere that at least tracks the mechanism, and SP3 is the tightest available expression of the mechanism.

The other reason I am going to play is that I am not going to play large. This is the part where most retail investors get it wrong. They discover the mechanism, believe it, and then put 80% of their net worth into it. Then the mechanism runs in reverse on the 5-to-20-year horizon, and they are catastrophically exposed at exactly the moment they can least afford to be.

My Actual Hedge Stack

I own operating businesses. My family operates the businesses together. The equity in those businesses is not correlated with the passive-flow mechanism, because the businesses generate cash from customer operations, not from stock price. If the mechanism reverses tomorrow, my businesses continue to generate revenue. If the mechanism continues for another decade, my businesses continue to generate revenue. The businesses are not a hedge against the mechanism specifically; they are a hedge against everything else, because their value derives from productive cash flow rather than from narrative and flow.

I have a low personal-expense base. My mortgage is under $238,000 at 3.375% — the rate is from a time when rates were, briefly, sane. My primary vehicle is a 2006 Toyota Tundra with 360,000 miles on it. My family drives a similar truck. The monthly nut I have to cover to keep my household running and my kids fed is small relative to the cash flow my businesses generate. That low base is itself an enormous hedge. It means I can weather a long drawdown without selling assets at the bottom. It means I don't have to maintain a specific income level. It means I can afford to be wrong about the mechanism without being financially ruined.

I have practical skills. I am a 100-ton Master mariner. I am a technical diving instructor. I have been shipping massively multiplayer games and software professionally since 1994 — thirty-two years of actually putting things in front of users and getting paid for it. I have led teams of a thousand engineers. I have built and sold companies. If civilizational disruption is severe enough to make the SP3 position worthless — a scenario so extreme that essentially all financial assets would be simultaneously compromised — I can feed my family and be useful to my community through skills that don't depend on the financial system continuing to work. This is a tail hedge against the tail of the tail, but it is real.

I have confidence in my ability to make money again in whatever economic regime comes next. I have done it three times in my life already — in different industries, different technology generations, different macro environments. The skills that produce income are not the same as the skills that produce investment returns. Someone who can only make money through investing is uniquely vulnerable to regime change. Someone who can go out and generate income in whatever the New Dollar™ happens to be is vastly more resilient, regardless of what happens to any given asset class.

These four hedges — operating businesses, low expense base, practical skills, confidence in earning — are not in a financial advisor's brochure. You cannot buy them at Fidelity. Most investment content ignores them because it cannot monetize them. They are, in my view, far more important than any allocation decision within the financial portfolio. They are what makes the allocation decision survivable rather than fragile.

The Operational Recipe

With those hedges in place, the SP3 strategy becomes simple.

• A defined percentage of net worth — roughly 15 to 25 percent — goes into the SP3 basket. Not 50%. Not 80%. A meaningful slice that will compound over time but that can be entirely destroyed without ending my family's ability to live the life we live.
• Monthly dollar-cost average. An automatic transfer from my operating cash account into a brokerage account. From the brokerage account, an automatic recurring buy split equally across the three names that are currently at the top of the S&P 500 by market cap. Today that is Apple, Microsoft, and Nvidia. Tomorrow it might include someone else.
• Never sell. Not in drawdowns. Not at all-time highs. Not because the P/E looks expensive. The strategy's entire edge depends on riding through the emotional pressure to sell. If you can't commit to never selling, don't start — pick a different strategy.
• Update the three tickers when cap-weight membership actually changes. This happens roughly every one to three years. It takes fifteen minutes in the brokerage interface. It does not involve market timing.
• Monitor the leading indicators annually. Passive AUM share, top-10 S&P 500 concentration, Mag 7 P/E premium, net 401(k) flow, M2 growth, antitrust activity, key political developments. I spend perhaps an hour per year on this. If the indicators start lighting up in the direction of regime change, I reassess.
• Do not tell anyone. This is meta, but it matters. Every person who adopts this strategy contributes to the very mechanism they are trying to exploit. The strategy only works while a meaningful minority plays it. If everyone plays it, it becomes the market, and the concentration-over-SPY edge disappears. Quiet participation is not just good manners; it is structurally required for the strategy to continue working for any individual player.

That's it. The whole recipe. Tight concentration, monthly flow, never sell, annual check-in, quiet participation.

The Closing Thought

The game is not fair. A fair market would price discover. A fair market would punish overvaluation and reward undervaluation. A fair market would treat a dollar that wants to buy Costco the same as a dollar that wants to buy McCormick. Our market, structurally, does not do any of these things anymore. It treats a dollar that flows through a target-date fund differently than a dollar that flows through a value manager. It rewards being at the top of the cap distribution with compounding flow. It penalizes being in the middle or bottom with proportional starvation.

You can reject this and sit out. I understand the impulse. I had it. If you sit out, the game continues without you, and your share of the economy shrinks while the mechanism compounds around you. You have not changed the mechanism; you have only chosen to be a smaller and smaller part of the resulting wealth distribution.

You can reject this and rail against it. I understand this impulse too. It is the correct political response in aggregate — voters should be demanding policy responses to the concentration that the mechanism produces. Political change is the only thing that will eventually rebalance this. But railing doesn't rebalance your personal position. It only affects the timeline of the eventual policy response.

Or you can do what I've decided to do: play the rigged game with a sized portion of your capital, hedge everything else with things that don't depend on the rigged game continuing, and live a life whose foundations are durable enough to survive whatever regime comes next.

Drive a truck with high miles. Keep your mortgage low. Run businesses that make something real. Know how to fix things with your hands. Trust that you can make money again if the money you have today becomes worthless. And put the excess — the portion of capital you honestly do not have the attention budget to actively manage — into the three companies that BlackRock and Vanguard are forced to buy every month regardless of price.

It is not a romantic strategy. It is not how I would want the world to work. It is what the math actually says is happening, and what I have concluded is the least bad way to navigate it.

The top three and the Tundra. That's the whole thing.

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If you want the math — the backtests, the structural tests, the real-terms analysis — I have the scripts and data available. The thesis stands on its numbers, not on its prose.