The Danger in Betting on Big Stocks
/by Shelley Murasko
At the 2021 Berkshire Hathaway Annual Shareholders Meeting, Chairman and CEO Warren Buffett shared a critical investing lesson: the dangers of focusing solely on the largest stocks like Apple, Amazon, and Google. During his annual meetings, Buffett frequently illustrates how market trends shift, emphasizing why investors should carefully consider where they allocate their money.
In 2021, he presented a list showing how the top 20 largest companies had dramatically changed over 40 years. His message was clear: the pursuit of big stocks is not always a winning strategy.
A Tale of Two Lists: 1980s vs. 2021
Buffett began by showing the list of the 20 largest companies in 1980. To many investors, these names represented powerhouses destined to dominate for decades. However, when he flipped to the top 20 companies by market cap in 2021, the differences were striking. Very few of the 1980s companies remained in the top ranks.
A Snapshot of the Biggest Stocks: 1980 vs. 2021
Here’s a look at the top 20 companies by market cap in 1980 compared to 2021:
Only three companies from the 1980 list remained in the top 20 by 2021. Seventeen companies fell from the ranks and were replaced by new market leaders. This stark contrast underscores a key lesson: just because a company is big today doesn’t mean it will stay on top forever.
As companies grow, they face increasing challenges, and the very factors that help them rise—such as innovation and market dominance—eventually slow down as they reach a size where growth becomes harder to sustain.
The Nvidia Dilemma: The Allure of New Giants
Take Nvidia, for example. Its meteoric rise in recent years has made it a market darling. The explosion of artificial intelligence (AI) and demand for its graphics chips have propelled Nvidia into the spotlight, establishing it as one of the world’s most valuable companies. On the surface, it seems like the perfect “must-own” stock.
However, history offers a cautionary tale. Stocks that climb to the top of the market cap leaderboard often experience a reversal in performance after reaching the giants’ ranks. From 1927 to 2023, data showed that stocks in the three years before entering the top 10 by market capitalization posted annualized returns 25% higher than the broader market. Early investors were often rewarded handsomely.
But here’s the catch: once these rising companies make their way into the top 10, their performance tends to change. After five years, stocks that reach the top 10 often underperform in the broader market. By the 10-year mark, the gap widens further. While some companies—like Apple, Microsoft, and other tech giants—continue to perform well, these are exceptions, not the rule.
The Case for Diversification and Caution
This historical trend serves as a reminder for investors not to put all their eggs in the big-stock basket. It’s easy to become enamored with success stories like Nvidia, but doing so without considering the potential for future underperformance can derail long-term goals.
Diversifying your portfolio across sectors, industries, and company sizes can help protect against this risk. The market is full of potential opportunities, many of which aren’t in the top 20 or top 10 by market cap.
A Lesson in Patience and Discernment
The bottom line is that stock prices reflect expectations, and once a company joins the top ranks, those expectations can be difficult to meet. While big stocks can still provide solid returns, the outsized growth that propelled them to the top often wanes once they get there.
Investors should remember that chasing the biggest stocks isn’t a prudent strategy. Instead, focus on diversification, long-term value, and companies with strong fundamentals. While it’s tempting to ride the coattails of Nvidia and its peers, the best investments often come from looking beyond size and popularity and seeking out opportunities that can deliver sustained growth over time. Today’s biggest stocks may not be the leaders tomorrow, so ensure your portfolio is prepared for that reality.
Is your portfolio truly diversified for long-term success? Contact us today for a personalized evaluation. We’ll help you optimize your holdings to ensure steady growth and minimize unnecessary risks.
