Top stocks of 2000 trail the market over the next 18 years

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
User avatar
willthrill81
Posts: 6104
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Top stocks of 2000 trail the market over the next 18 years

Post by willthrill81 » Wed Oct 17, 2018 11:39 pm

I became aware earlier of research which indicated that the largest companies in a country's stock market, as defined by market capitalization, tend to underperform the rest of the market going forward. But it wasn't until today that I came across such a dramatic example of this in action from Research Affiliates. This article concerned market bubbles, but this paragraph is interesting even out of that context.
At the beginning of 2000, the 10 largest market-cap tech stocks in the United States, collectively representing a 25% share of the S&P 500 Index—Microsoft, Cisco, Intel, IBM, AOL, Oracle, Dell, Sun, Qualcomm, and HP—did not live up to the excessively optimistic expectations. Over the next 18 years, not a single one beat the market: five produced positive returns, averaging 3.2% a year compounded, far lower than the market return, and two failed outright. Of the five that produced negative returns, the average outcome was a loss of 7.2% a year, or 12.6% a year less than the S&P 500.
emphasis added
https://www.researchaffiliates.com/en_u ... -what.html

I'm sure that someone has done something like this, but I would find it interesting to see the performance of the S&P 500 or total stock market minus the top 10 stocks by market cap over time.

I'll also be interested to see whether this trend continues into the future. I suspect that it will.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

madbrain
Posts: 5123
Joined: Thu Jun 09, 2011 5:06 pm
Location: San Jose, California

Re: Top stocks of 2000 trail the market over the next 18 years

Post by madbrain » Wed Oct 17, 2018 11:56 pm

I worked for 4 out of those 10 . I guess that's why I'm still working !

AlphaLess
Posts: 809
Joined: Fri Sep 29, 2017 11:38 pm
Location: Kentucky
Contact:

Re: Top stocks of 2000 trail the market over the next 18 years

Post by AlphaLess » Thu Oct 18, 2018 12:15 am

Excellent observation.
Except for MSFT, the rest are companies that stopped innovating.

So, what does that research say about today's top 5 tech companies:

AAPL
AMZN
GOOG
MSFT
FB
CSCO
INTC

BTW, the first 3 make up nearly 1/3 of QQQ.
"You can get more with a kind word and a gun than with just a kind word." George Washington

wootwoot
Posts: 181
Joined: Tue Jan 27, 2009 7:37 pm

Re: Top stocks of 2000 trail the market over the next 18 years

Post by wootwoot » Thu Oct 18, 2018 12:23 am

What point are you trying to make? 2000 was the height of the tech bubble and these companies were decimated afterwards. New contenders stepped in and capitalized on the market over the next 18 years. How did other sectors perform?

User avatar
JoMoney
Posts: 6116
Joined: Tue Jul 23, 2013 5:31 am

Re: Top stocks of 2000 trail the market over the next 18 years

Post by JoMoney » Thu Oct 18, 2018 12:38 am

One of the reasons some people buy an index is they believe picking a portfolio of 10 stocks is likely to underperform the broad market. Tell me how to pick the 10 that will beat the market (in advance).
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

JBTX
Posts: 4089
Joined: Wed Jul 26, 2017 12:46 pm

Re: Top stocks of 2000 trail the market over the next 18 years

Post by JBTX » Thu Oct 18, 2018 12:38 am

Well if none of the top 10 are still in the top 10 it's pretty much a lock that they suffered lower returns than average.

The problem with excluding the top 10 is you miss an apple Google or Amazon going from 10 to 1,2 or 3, and that could be a lot of missed upside.

User avatar
nisiprius
Advisory Board
Posts: 36861
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Top stocks of 2000 trail the market over the next 18 years

Post by nisiprius » Thu Oct 18, 2018 5:48 am

If your point is that a portfolio of a few "obviously good" stocks is not the sure thing many people think it is, I agree. You can demonstrate this point in many ways. The "top stocks" underperformed. I'm fond of tracking the three stocks named by the authors of Dow 36,000 in 1999. They chose them on the basis of six very reasonable-sounding conservative criteria based on earnings and dividends, willingness of management to invest in the company etc. In 1999 I think almost everyone would have agreed that a portfolio of those three stocks was sure to be fine, and the biggest criticism would have been that they played it too safe. The three were GE, Microsoft, and Tootsie Roll.

If your point is that this is a "trend" that "will continue," that thus you can outperform the market by contrarian investing, specifically by counting on reversion to the mean happening regularly enough and predictably enough that you can beat them market just by excluding (or shorting?) the ten largest, then I doubt it. Basically that would be an idea similar to "Dogs of the Dow' which consisted of systematically investing in the worst-performing stocks of the Dow. The exact details of how to do this kept shifting because each successly tweaked version of Dogs in the Dow failed to outperform, so people kept coming out with new, improved versions.

I found the article itself shallow. Even if you agree that there's a cryptcurrency craze and that it represents bubble psychology, it is outside the stock market, whereas the tech craziness (new economy, it's different, earnings are no longer an appropriate measure, etc.) was right inside the stock market and directly influencing stock market investors. The cryptocurrency craze has cooled off a lot and I dont think it's unreasonable to say that the latest fever has broken (bitcoin hitting $20,000 at the end of 2017, what is it now? $7,000). One might as well say that postings about the Megamillions in Bogleheads are evidence of a stock market bubble.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

asif408
Posts: 1476
Joined: Sun Mar 02, 2014 8:34 am
Location: Florida

Re: Top stocks of 2000 trail the market over the next 18 years

Post by asif408 » Thu Oct 18, 2018 7:36 am

I think that is the idea behind the RAFI funds. They weight the stocks not by market cap but by several other measures (e.g., P/B, P/S, etc), which in practice means they underweight those top stocks and overweight other stocks in the index. Sometimes that is a good thing and sometimes it isn't. From what I've heard Arnott say about the top 10, I don't think you would want to necessarily leave them out because, even though they may underperform the index, they don't necessarily underperform all the stocks in the index.

staythecourse
Posts: 6121
Joined: Mon Jan 03, 2011 9:40 am

Re: Top stocks of 2000 trail the market over the next 18 years

Post by staythecourse » Thu Oct 18, 2018 8:38 am

willthrill81 wrote:
Wed Oct 17, 2018 11:39 pm
I became aware earlier of research which indicated that the largest companies in a country's stock market, as defined by market capitalization, tend to underperform the rest of the market going forward. But it wasn't until today that I came across such a dramatic example of this in action from Research Affiliates. This article concerned market bubbles, but this paragraph is interesting even out of that context.
At the beginning of 2000, the 10 largest market-cap tech stocks in the United States, collectively representing a 25% share of the S&P 500 Index—Microsoft, Cisco, Intel, IBM, AOL, Oracle, Dell, Sun, Qualcomm, and HP—did not live up to the excessively optimistic expectations. Over the next 18 years, not a single one beat the market: five produced positive returns, averaging 3.2% a year compounded, far lower than the market return, and two failed outright. Of the five that produced negative returns, the average outcome was a loss of 7.2% a year, or 12.6% a year less than the S&P 500.
emphasis added
https://www.researchaffiliates.com/en_u ... -what.html

I'm sure that someone has done something like this, but I would find it interesting to see the performance of the S&P 500 or total stock market minus the top 10 stocks by market cap over time.

I'll also be interested to see whether this trend continues into the future. I suspect that it will.
Very interesting. 3 points.

First, Has anyone did a rolling approach looking further back at 5, 10, 20 year intervals. Think you need to do that before you can say this thought has some wheels otherwise it may just be a sampling error.

Second, is if the above is true I LOVE the idea if there was some way to invest to to a SP500-10 approach. Wonder how you would implement it.

Third, does this advocate for equal weight at least in the sp500 sector?

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

financeperchance
Posts: 82
Joined: Thu Nov 02, 2017 11:15 am

Re: Top stocks of 2000 trail the market over the next 18 years

Post by financeperchance » Thu Oct 18, 2018 8:57 am

During any given year, the majority of the S&P 500's return comes from a minority of companies. I did my own study of this using Yahoo Finance's historical stock price data, and I can't find the spreadsheet right now, but I found basically 60% or so of the S&P's components do worse than the average in a given year.

To see the past year for yourself though, check this out:
https://finviz.com/screener.ashx?v=141& ... o=-perf52w

In the past year, VOO (Vanguard's 500 index ETF) is up 9.81%. In that Finviz link above, there are 10.5 pages of stocks that did 9.81% or better. There are 15.5 pages of stocks that did worse.

So basically, any given group of 10 stocks is highly likely to underperform the S&P over the next year.

That's the fundamental problem with this study... it didn't look at other groups of 10 stocks. I almost guarantee that if you looked at the bottom 10 stocks of 2000 you'd also find underperformance over the next 18 years. I'm not sure where you'd find that list, but it sure would be interesting.

financeperchance
Posts: 82
Joined: Thu Nov 02, 2017 11:15 am

Re: Top stocks of 2000 trail the market over the next 18 years

Post by financeperchance » Thu Oct 18, 2018 9:03 am

JBTX wrote:
Thu Oct 18, 2018 12:38 am
Well if none of the top 10 are still in the top 10 it's pretty much a lock that they suffered lower returns than average.

The problem with excluding the top 10 is you miss an apple Google or Amazon going from 10 to 1,2 or 3, and that could be a lot of missed upside.
In a group of 500 companies, suppose in any given year that a stock has a 40% chance of outperforming and a 60% chance of underperforming.

What are the odds that 18 years later the top 10 would still be the same?

It's an interesting mathematical question, but I'd bet it's less than 1%.
Last edited by financeperchance on Fri Oct 19, 2018 8:45 am, edited 1 time in total.

Valuethinker
Posts: 36337
Joined: Fri May 11, 2007 11:07 am

Re: Top stocks of 2000 trail the market over the next 18 years

Post by Valuethinker » Thu Oct 18, 2018 9:05 am

willthrill81 wrote:
Wed Oct 17, 2018 11:39 pm
I became aware earlier of research which indicated that the largest companies in a country's stock market, as defined by market capitalization, tend to underperform the rest of the market going forward. But it wasn't until today that I came across such a dramatic example of this in action from Research Affiliates. This article concerned market bubbles, but this paragraph is interesting even out of that context.
At the beginning of 2000, the 10 largest market-cap tech stocks in the United States, collectively representing a 25% share of the S&P 500 Index—Microsoft, Cisco, Intel, IBM, AOL, Oracle, Dell, Sun, Qualcomm, and HP—did not live up to the excessively optimistic expectations. Over the next 18 years, not a single one beat the market: five produced positive returns, averaging 3.2% a year compounded, far lower than the market return, and two failed outright. Of the five that produced negative returns, the average outcome was a loss of 7.2% a year, or 12.6% a year less than the S&P 500.
emphasis added
https://www.researchaffiliates.com/en_u ... -what.html

I'm sure that someone has done something like this, but I would find it interesting to see the performance of the S&P 500 or total stock market minus the top 10 stocks by market cap over time.

I'll also be interested to see whether this trend continues into the future. I suspect that it will.
To me what is interesting is you can be totally write about secular trends - growth of the Internet, growth of ecommerce, growth of mobile

and still get your stock selection totally wrong.

Think Nokia, RIM (Blackberry), Nortel, Vodafone - all huge international tech companies that were on the right side of history - and the wrogn side of stock performance. Nortel went bust. RIM missed the touchscreen smartphone revolution and never caught up. Vodafone had the largest writeoff in UK corporate history (£28bn on Mannesman) pre the financial crash but actually did fairly well for shareholders (when they sold 49% of Verizon Wireless they then paid the largest dividend in *any* corporate history, not just UK). Nokia missed the smartphone.

Of the FAANGs. Facebook did not exist yet. Apple had yet to invent the smartphone. Amazon was important but nobody thought it would ever make much money. Netflix barely existed? Google was a small private company.

User avatar
willthrill81
Posts: 6104
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Top stocks of 2000 trail the market over the next 18 years

Post by willthrill81 » Thu Oct 18, 2018 9:40 am

nisiprius wrote:
Thu Oct 18, 2018 5:48 am
If your point is that this is a "trend" that "will continue," that thus you can outperform the market by contrarian investing, specifically by counting on reversion to the mean happening regularly enough and predictably enough that you can beat them market just by excluding (or shorting?) the ten largest, then I doubt it.
I recall hearing about research which indicated that, on average, the single largest stock by market cap underperformed the rest of the market by something like 5%. Unfortunately, I cannot find it now.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

financeperchance
Posts: 82
Joined: Thu Nov 02, 2017 11:15 am

Re: Top stocks of 2000 trail the market over the next 18 years

Post by financeperchance » Thu Oct 18, 2018 9:48 am

delete
Last edited by financeperchance on Fri Oct 19, 2018 8:44 am, edited 1 time in total.

User avatar
willthrill81
Posts: 6104
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Top stocks of 2000 trail the market over the next 18 years

Post by willthrill81 » Thu Oct 18, 2018 9:49 am

staythecourse wrote:
Thu Oct 18, 2018 8:38 am
First, Has anyone did a rolling approach looking further back at 5, 10, 20 year intervals. Think you need to do that before you can say this thought has some wheels otherwise it may just be a sampling error.
Agreed. Although if you just look at the makeup of the ten largest stocks in the S&P 500, you see that very few companies stay there for longer than 5-10 years. Exxon has been about the only one to consistently stay there for a long period of time. I believe this is the case in other nations' stock markets as well.
staythecourse wrote:
Thu Oct 18, 2018 8:38 am
Second, is if the above is true I LOVE the idea if there was some way to invest to to a SP500-10 approach. Wonder how you would implement it.
You could buy an S&P 500 index fund and zero your position in the top ten stocks with futures contracts.
staythecourse wrote:
Thu Oct 18, 2018 8:38 am
Third, does this advocate for equal weight at least in the sp500 sector?
I'm not sure. RSP has had higher absolute returns but nearly identical risk-adjusted returns to a market cap weighting of the S&P 500 since the former's inception.

I wonder whether the largest companies simply have a tendency to be valued too highly. Perhaps it is similar to consumer markets, whereby the largest segments in a market receive a disproportionate amount of attention by firms in that market (e.g. a segment representing 50% of the market is the object of 75% of firms' sum total activity). Some might think it's due to the incumbent's curse, but academics now dismiss the validity of that idea, at least when it comes to producing innovative products.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

User avatar
willthrill81
Posts: 6104
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Top stocks of 2000 trail the market over the next 18 years

Post by willthrill81 » Thu Oct 18, 2018 9:51 am

JBTX wrote:
Thu Oct 18, 2018 12:38 am
The problem with excluding the top 10 is you miss an apple Google or Amazon going from 10 to 1,2 or 3, and that could be a lot of missed upside.
But it also means that you're holding #1, #2, etc. as they slip back down as well.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Valuethinker
Posts: 36337
Joined: Fri May 11, 2007 11:07 am

Re: Top stocks of 2000 trail the market over the next 18 years

Post by Valuethinker » Thu Oct 18, 2018 10:04 am

willthrill81 wrote:
Thu Oct 18, 2018 9:49 am
staythecourse wrote:
Thu Oct 18, 2018 8:38 am
First, Has anyone did a rolling approach looking further back at 5, 10, 20 year intervals. Think you need to do that before you can say this thought has some wheels otherwise it may just be a sampling error.
Agreed. Although if you just look at the makeup of the ten largest stocks in the S&P 500, you see that very few companies stay there for longer than 5-10 years. Exxon has been about the only one to consistently stay there for a long period of time. I believe this is the case in other nations' stock markets as well.
Or at least of the Dow stocks in 1900 that are still there now.

We used to say GE too ;-).

I am guessing, but JP Morgan (on Dow stocks).

staythecourse
Posts: 6121
Joined: Mon Jan 03, 2011 9:40 am

Re: Top stocks of 2000 trail the market over the next 18 years

Post by staythecourse » Thu Oct 18, 2018 10:55 am

willthrill81 wrote:
Thu Oct 18, 2018 9:49 am

You could buy an S&P 500 index fund and zero your position in the top ten stocks with futures contracts.
If I was going to do be more active in my investing I really like this idea. Has anyone done this you know?

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

User avatar
willthrill81
Posts: 6104
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Top stocks of 2000 trail the market over the next 18 years

Post by willthrill81 » Thu Oct 18, 2018 11:02 am

staythecourse wrote:
Thu Oct 18, 2018 10:55 am
willthrill81 wrote:
Thu Oct 18, 2018 9:49 am

You could buy an S&P 500 index fund and zero your position in the top ten stocks with futures contracts.
If I was going to do be more active in my investing I really like this idea. Has anyone done this you know?

Good luck.
I'm not aware of anyone who has. But again, I'd really like to see more data on this to see what the historic impact would have been had you avoided something like the top 10 market cap weighted stocks.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

User avatar
goodenyou
Posts: 1382
Joined: Sun Jan 31, 2010 11:57 pm
Location: Skating to Where the Puck is Going to Be..or on the golf course

Re: Top stocks of 2000 trail the market over the next 18 years

Post by goodenyou » Thu Oct 18, 2018 11:49 am

We will soon be de-FAANGed :shock:
"Ignorance more frequently begets confidence than does knowledge" | "The best years you have left are the ones you have right now"

Tamales
Posts: 1294
Joined: Sat Jul 05, 2014 10:47 am

Re: Top stocks of 2000 trail the market over the next 18 years

Post by Tamales » Thu Oct 18, 2018 11:54 am

I can't imagine how an investment in "S&P lower 490" would be a good investment long term.

User avatar
willthrill81
Posts: 6104
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Top stocks of 2000 trail the market over the next 18 years

Post by willthrill81 » Thu Oct 18, 2018 12:00 pm

Tamales wrote:
Thu Oct 18, 2018 11:54 am
I can't imagine how an investment in "S&P lower 490" would be a good investment long term.
Why? Do you believe that the top ten stocks will outperform the other 490?
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

JBTX
Posts: 4089
Joined: Wed Jul 26, 2017 12:46 pm

Re: Top stocks of 2000 trail the market over the next 18 years

Post by JBTX » Thu Oct 18, 2018 12:20 pm

willthrill81 wrote:
Thu Oct 18, 2018 12:00 pm
Tamales wrote:
Thu Oct 18, 2018 11:54 am
I can't imagine how an investment in "S&P lower 490" would be a good investment long term.
Why? Do you believe that the top ten stocks will outperform the other 490?
If you go back far enough you could probably eliminate most of the s&p 500.

I think the answer is eliminating the top 10 will only be favorable if the percent of top 10 relative to 500 decreases. If it increases it would hurt you. It doesn't really matter which companies are in there.

aristotelian
Posts: 4774
Joined: Wed Jan 11, 2017 8:05 pm

Re: Top stocks of 2000 trail the market over the next 18 years

Post by aristotelian » Thu Oct 18, 2018 12:39 pm

Interesting to look at the historical components of the Dow. Going back to 1985, I think 3M, Exxon, Merck, and P&G are the only ones that remain. Stands to reason that what goes up most come down. However, the hard part would be predicting when. It may not be the case that S&P-10 would outperform over time even if it is true that some/all of the individual companies inevitably underperform at some point. https://en.wikipedia.org/wiki/Historica ... al_Average

jalbert
Posts: 3815
Joined: Fri Apr 10, 2015 12:29 am

Re: Top stocks of 2000 trail the market over the next 18 years

Post by jalbert » Thu Oct 18, 2018 12:51 pm

asif408 wrote:
Thu Oct 18, 2018 7:36 am
I think that is the idea behind the RAFI funds. They weight the stocks not by market cap but by several other measures (e.g., P/B, P/S, etc), which in practice means they underweight those top stocks and overweight other stocks in the index. Sometimes that is a good thing and sometimes it isn't. From what I've heard Arnott say about the top 10, I don't think you would want to necessarily leave them out because, even though they may underperform the index, they don't necessarily underperform all the stocks in the index.
How did those stocks fare if the start date is 1995 instead of 2000? I’m not advocating for stock picking or holding a portfolio of 10 stocks, but investment companies cherry-picking dates in studies backtests they do to show that their product is superior is beyond tiresome.
Risk is not a guarantor of return.

User avatar
willthrill81
Posts: 6104
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Top stocks of 2000 trail the market over the next 18 years

Post by willthrill81 » Thu Oct 18, 2018 1:25 pm

aristotelian wrote:
Thu Oct 18, 2018 12:39 pm
Interesting to look at the historical components of the Dow. Going back to 1985, I think 3M, Exxon, Merck, and P&G are the only ones that remain. Stands to reason that what goes up most come down. However, the hard part would be predicting when. It may not be the case that S&P-10 would outperform over time even if it is true that some/all of the individual companies inevitably underperform at some point. https://en.wikipedia.org/wiki/Historica ... al_Average
jalbert wrote:
Thu Oct 18, 2018 12:51 pm
asif408 wrote:
Thu Oct 18, 2018 7:36 am
I think that is the idea behind the RAFI funds. They weight the stocks not by market cap but by several other measures (e.g., P/B, P/S, etc), which in practice means they underweight those top stocks and overweight other stocks in the index. Sometimes that is a good thing and sometimes it isn't. From what I've heard Arnott say about the top 10, I don't think you would want to necessarily leave them out because, even though they may underperform the index, they don't necessarily underperform all the stocks in the index.
How did those stocks fare if the start date is 1995 instead of 2000? I’m not advocating for stock picking or holding a portfolio of 10 stocks, but investment companies cherry-picking dates in studies backtests they do to show that their product is superior is beyond tiresome.
That's why I'd like to see more extensive testing of this idea.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Tamales
Posts: 1294
Joined: Sat Jul 05, 2014 10:47 am

Re: Top stocks of 2000 trail the market over the next 18 years

Post by Tamales » Thu Oct 18, 2018 1:26 pm

willthrill81 wrote:
Thu Oct 18, 2018 12:00 pm
Tamales wrote:
Thu Oct 18, 2018 11:54 am
I can't imagine how an investment in "S&P lower 490" would be a good investment long term.
Why? Do you believe that the top ten stocks will outperform the other 490?
How this strategy would be implemented needs to be more specifically defined (even to answer the question you posed, and to address my supposition) since it will change the results--perhaps dramatically.

For example, on Jan 1 of each year, you invest in the lower-490 as it existed (?: the last day of prior year, 5 years prior, 10 years prior, 18 years prior, etc, and the longer the term the more you can't replicate it because of M&A, company failures). What if you did it on Oct 1 of each year (or any other day) instead? And then repeat this process on Jan 1 (or whatever date) of each year? or would the holding period need to be longer than a year at a given lower-490 composition? And what time period do you evaluate success or failure over? There are multiple layers of variables, and probably a wide range of results depending on the choices of those variables. For that matter, even if an 18 year look-back happened to be a magic number for a snapshot in time, it's unlikely to be the magic number for perpetuity.

I'll accept that if you did the massive data-mining exercise across all the variable I described above that there would probably be some great outcomes purely by chance. I just doubt it is repeatable as essentially a "law of nature."

financeperchance
Posts: 82
Joined: Thu Nov 02, 2017 11:15 am

Re: Top stocks of 2000 trail the market over the next 18 years

Post by financeperchance » Thu Oct 18, 2018 1:28 pm

I don't know if I'm shadow banned and nobody's seeing my posts, but again, how on earth, if each stock has a 60% chance of underperforming in a given year, would the top ten stocks not underperform the rest of the market over an extremely long period such as 18 years?

And wouldn't this be true of any group of ten stocks?

garlandwhizzer
Posts: 2017
Joined: Fri Aug 06, 2010 3:42 pm

Re: Top stocks of 2000 trail the market over the next 18 years

Post by garlandwhizzer » Thu Oct 18, 2018 1:31 pm

willthrill81 wrote:

I recall hearing about research which indicated that, on average, the single largest stock by market cap underperformed the rest of the market by something like 5%. Unfortunately, I cannot find it now.
Meb Faber of Cambria Investments studied what happened to the largest stocks by market cap in the US over long time frames. I don't recall the degree to which they underperformed going forward over long time frames but it was significant. The largest cap stocks are almost always LCG, never LCV, and organic growth like everything else is cyclical. High rates of fundamental profit growth don't continue forever and often slows down on a percentage basis especially when market cap gets to egregious levels. Most mega cap growth is currently in tech. Tech is a great engine of creating wealth, but it is also a great engine for destroying wealth as a brand new innovative technology consumes the old established tech's market. Creative destruction is what tech does. Most of the mega cap tech darlings of today are likely to fall by the wayside and be replaced in the long run although no one knows exactly how long the long run is.

Garland Whizzer

User avatar
willthrill81
Posts: 6104
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Top stocks of 2000 trail the market over the next 18 years

Post by willthrill81 » Thu Oct 18, 2018 1:36 pm

financeperchance wrote:
Thu Oct 18, 2018 1:28 pm
I don't know if I'm shadow banned and nobody's seeing my posts, but again, how on earth, if each stock has a 60% chance of underperforming in a given year, would the top ten stocks not underperform the rest of the market over an extremely long period such as 18 years?

And wouldn't this be true of any group of ten stocks?
Possibly. But it could be that there is something about being one of the ten most highly valued companies that leads to underperformance beyond what would otherwise be expected.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

User avatar
JoMoney
Posts: 6116
Joined: Tue Jul 23, 2013 5:31 am

Re: Top stocks of 2000 trail the market over the next 18 years

Post by JoMoney » Thu Oct 18, 2018 2:04 pm

The largest by market-cap don't beat the market aggregate.
The smallest by market-cap don't beat the market aggregate.
Mel's Mid-Caps For The Win ?
< Morningstar Chart Wilshire Large-Cap v. Micro-Cap v. Mid-Cap >
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

cheezit
Posts: 58
Joined: Sat Jul 14, 2018 7:28 pm

Re: Top stocks of 2000 trail the market over the next 18 years

Post by cheezit » Thu Oct 18, 2018 3:26 pm

Tamales wrote:
Thu Oct 18, 2018 11:54 am
I can't imagine how an investment in "S&P lower 490" would be a good investment long term.
If you look at IVV (S&P 500, large caps), IJH (S&P 400, small caps) and IJR (S&P 600, small caps) from inception to today, it looks like "S&P 1500 lower 1000" has been a good investment in at least the medium term (18 years).

User avatar
Mel Lindauer
Moderator
Posts: 28642
Joined: Mon Feb 19, 2007 8:49 pm
Location: Daytona Beach Shores, Florida
Contact:

Re: Top stocks of 2000 trail the market over the next 18 years

Post by Mel Lindauer » Thu Oct 18, 2018 4:19 pm

JoMoney wrote:
Thu Oct 18, 2018 2:04 pm
The largest by market-cap don't beat the market aggregate.
The smallest by market-cap don't beat the market aggregate.
Mel's Mid-Caps For The Win ?
< Morningstar Chart Wilshire Large-Cap v. Micro-Cap v. Mid-Cap >
2000 was when I first started calling attention to Mel's Unloved Mid-Caps in a discussion with Larry Swedroe on the old Morningstar Vanguard Diehards forum.
Best Regards - Mel | | Semper Fi

financeperchance
Posts: 82
Joined: Thu Nov 02, 2017 11:15 am

Re: Top stocks of 2000 trail the market over the next 18 years

Post by financeperchance » Thu Oct 18, 2018 4:55 pm

[deleting this. thanks]
Last edited by financeperchance on Fri Oct 19, 2018 8:44 am, edited 1 time in total.

User avatar
JoMoney
Posts: 6116
Joined: Tue Jul 23, 2013 5:31 am

Re: Top stocks of 2000 trail the market over the next 18 years

Post by JoMoney » Thu Oct 18, 2018 5:44 pm

The implication of this and similar anti-market cap weighting articles, is that the largest market-cap stocks are somehow over-priced at the time an investor purchases them in a cap weighted strategy.
Something I haven't seen mentioned, is that it would also imply there is a benefit to the strategy on the back-end when an investor is withdrawing. It would mean the cap-weighted investor in withdrawal is selling more (by weight) of their over-priced stocks at that point in time :D
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

financeperchance
Posts: 82
Joined: Thu Nov 02, 2017 11:15 am

Re: Top stocks of 2000 trail the market over the next 18 years

Post by financeperchance » Thu Oct 18, 2018 7:05 pm

[delete]
Last edited by financeperchance on Fri Oct 19, 2018 8:43 am, edited 1 time in total.

User avatar
willthrill81
Posts: 6104
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Top stocks of 2000 trail the market over the next 18 years

Post by willthrill81 » Thu Oct 18, 2018 7:18 pm

financeperchance wrote:
Thu Oct 18, 2018 7:05 pm
willthrill81 wrote:
Thu Oct 18, 2018 9:40 am
nisiprius wrote:
Thu Oct 18, 2018 5:48 am
If your point is that this is a "trend" that "will continue," that thus you can outperform the market by contrarian investing, specifically by counting on reversion to the mean happening regularly enough and predictably enough that you can beat them market just by excluding (or shorting?) the ten largest, then I doubt it.
I recall hearing about research which indicated that, on average, the single largest stock by market cap underperformed the rest of the market by something like 5%. Unfortunately, I cannot find it now.
No, actually it over-performs by 5%.
Very interesting indeed. I wonder if that same effect would hold true through different periods and/or in different markets (i.e. countries).
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

financeperchance
Posts: 82
Joined: Thu Nov 02, 2017 11:15 am

Re: Top stocks of 2000 trail the market over the next 18 years

Post by financeperchance » Thu Oct 18, 2018 7:33 pm

willthrill81 wrote:
Thu Oct 18, 2018 7:18 pm
financeperchance wrote:
Thu Oct 18, 2018 7:05 pm
willthrill81 wrote:
Thu Oct 18, 2018 9:40 am
nisiprius wrote:
Thu Oct 18, 2018 5:48 am
If your point is that this is a "trend" that "will continue," that thus you can outperform the market by contrarian investing, specifically by counting on reversion to the mean happening regularly enough and predictably enough that you can beat them market just by excluding (or shorting?) the ten largest, then I doubt it.
I recall hearing about research which indicated that, on average, the single largest stock by market cap underperformed the rest of the market by something like 5%. Unfortunately, I cannot find it now.
No, actually it over-performs by 5%.
Very interesting indeed. I wonder if that same effect would hold true through different periods and/or in different markets (i.e. countries).
Probably not. If there's one thing I've learned, it's that the stock market is never that easy (other than just buying the index).

[EDIT: I'm deleting the rest of this, since I don't want to lead anyone astray.]

heyyou
Posts: 3172
Joined: Tue Feb 20, 2007 4:58 pm

Re: Top stocks of 2000 trail the market over the next 18 years

Post by heyyou » Fri Oct 19, 2018 8:53 pm

From a different topic, but the same answer:
McClung ran each of the equity sub-asset classes separately in a 30 year retirement calculator. Yes, Small Growth did the worst, but the second worst was Large Growth (the category of most of the stocks in this discussion topic), so McClung tries to avoid both LG and SG in his recommended retirement portfolios. He does not specify if he wrapped the last 29 years of data by adding data from the first known 29 years to boost his 30 year sample size. He did do that later in his book.

The above does not mean that SmG and LG do not perform during retirement, only that they have less performance than the other sub-asset classes over those periods. My suspicion is that higher volatility is a disadvantage when steady retirement spending is applied to those Large Growth stocks. Also, Schiller has written that periods of high growth of the entire stock market, are often followed by periods of less growth. I wonder if due to the prior cap weighting, Large Growth's slower performance might proportionately hurt portfolios more during those slower periods.

I am susceptible to anchoring, so I tried to separate McClung and Schiller's research from my untutored interpretations using their findings.

User avatar
oldcomputerguy
Posts: 3443
Joined: Sun Nov 22, 2015 6:50 am
Location: In the middle of five acres of woods

Re: Top stocks of 2000 trail the market over the next 18 years

Post by oldcomputerguy » Sat Oct 20, 2018 7:48 am

financeperchance wrote:
Thu Oct 18, 2018 9:03 am
What are the odds that 18 years later the top 10 would still be the same?
https://www.callan.com/wp-content/uploa ... d_2018.pdf

I'd say pretty slim.
It’s taken me a lot of years, but I’ve come around to this: If you’re dumb, surround yourself with smart people. And if you’re smart, surround yourself with smart people who disagree with you.

Post Reply