It’s Hard to Stay on Top

Blog post #460

The Covid outbreak has caused each of us to adapt and change.

Adapting and dealing with change is not a new concept. In order to succeed over a long time period, organizations and companies must adapt and change to remain on top.

Very little stays constant. We know that change happens over time. Sometimes change is gradual and sometimes it’s sudden. Change can happen for many reasons.

Companies that are successful over long periods must be able to adapt and change, or they will be less successful or less profitable or shrink and possibly even go out of business.

The chart below shows the top 10 US stocks based on market capitalization by decade from 1930 to 2020. The data is based on their overall stock market value at the end of the calendar year, preceding the decade. For example, for 2020, Apple was the largest stock based on market cap as of December 31, 2019 (see the far right column, at the top).

Suggestion….if you can look at this chart on a device where you can enlarge it, the chart is much more informative.

Key takeaway: While some companies remained in the top 10 list for decades, this chart shows how much change there has been over the long term and how hard it is to remain in the top 10.

Based on this past evidence, it is hard to know with confidence if a top 10 stock today will be a top 10 stock in 2030 or 2040.

Exhibit 2, from DFA Article, “Large and In Charge? Giant Firms atop Market Is Nothing New”.

Some observations from this chart:

  1. From 2000, only 2 stocks that were in the top 10 are still in the top 10 as of the beginning of 2020. That is a significant amount of change in 20 short years. What 2 companies do you think these are? Think about this.  The answer is at the bottom.
  2. Apple was not in the top 10 until 2010. It is now #1.
  3. Of the top 10 in 2020, 5 of those companies were not in the top 10 at the beginning of 2010. That is an amazing amount of change in 10 years. And since the beginning of the year, JPMorgan would be out of the top 10 today, and either Tesla or Walmart would be #10. Tesla was far from the top 10 at the beginning of the year.
  4. What decade did Amazon begin in the top 10? The answer is at the bottom.
  5. What stock was in the top 10 every decade from 1930 through 2010, was #2 at 2000, but dropped out after 2010 and is now only about 110-120th largest as of June 30, 2020? General Electric.
  6. The chart by decade shows how the economy and world have changed significantly.
    • Energy stocks were 5 of the top 10 in 1980. There are no energy stocks in the top 10 now.
    • There were 5 technology stocks in 2000 (Microsoft, Cisco, Intel, Lucent and IBM) and 5 technology stocks on the list at the beginning of 2020. However, only Microsoft remains on the list from 2000 to 2020. And none of the other 4 stocks have done well in the 20 years since 2000, compared to the S&P 500 index.
      • Today’s leaders may not be the leader’s a decade or two from now.
      • To show how hard change is, Cisco was #3 in 2000. Its current price is still lower than it was at December 31, 1999. In 2007, Cisco purchased a company called WebEx, a web conferencing start-up. In 2011, a VP of Engineering pitched an idea for a smartphone-friendly conferencing system to Cisco executives. They rejected the idea and Eric Yuan left to establish Zoom Video Communications, which is now worth over $100 billion. Cisco is worth about $174 billion but could be worth so much more.
    • Since 1990, it appears that change is even more frequent, or that is even harder to remain in the top 10 list. At the beginning of each decade, these are the number of companies that appear on the list for the first or only time:
      • 1990:  4 companies
      • 2000:  5 companies
      • 2010:  1 company
      • 2020:  5 companies

While many of the current top stocks have performed extremely well in recent years, you should remember that expectations about future operational performance of a company should already be reflected in it current price. Positive developments that occur in the future that exceed current expectations (such as Covid’s positive impact so far on Amazon and Walmart) may lead to further gains in its stock price. However, unexpected changes are not predictable.

Historical data on the performance of the top 10 stocks following the year in which they joined the list of the 10 largest firms shows much less positive results. As Exhibit 3 below shows, these stocks outperformed the total stock market (this is not compared to the S&P 500) by 0.7% per year in the subsequent 3-year period. Over the subsequent 5- and 10-year periods, these stocks underperformed the total stock market on average by greater than 1% per year. This data was compiled for each calendar year between 1927-2019, not just by decade in the prior chart.



The only constant is change and this clearly applies to the dominant stocks in the market. It remains impossible to systematically predict which large companies will outperform the stock market and which will underperform it. This reminds us of the importance of having a broadly diversified portfolio that provides exposure to many companies and industry sectors.

Answers from above:

1. Microsoft (#1 in 2000, and #2 at the beginning of 2020) and Walmart (#4 in 2000 and #9 at the beginning of 2020).
4. Amazon was not in the top 10 in 2000 or in 2010. The first decade that Amazon appears in the top 10 was in 2020, ranking #3 at the beginning of 2020.


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