Summary
– Apple, Alphabet, Microsoft, Facebook, and Amazon are now the five largest U.S. market capitalization equities.
– Collectively their performance in 2017, the past three years, and the past decade has been amazing.
– They have also absorbed a tremendous amount of capital, sucking it away from other opportunities, and their run may be ending.
“A 60:40 allocation to passive long-only equities and bonds has been a great proposition for the last 35 years … We are profoundly worried that this could be a risky allocation over the next 10.” — Sanford C. Bernstein & Company Analysts (January 2017)
“Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria” — Sir John Templeton
Life and investing are long ballgames.” — Julian Robertson
Introduction
For active, value-orientated investors, the current bull market in U.S. stocks, which began in March of 2009, has been one of the most difficult bull markets to navigate in history. Said another way, it has not been anything like a day at the beach.
Keeping up with the market, without owning the five biggest market capitalization stocks, which are all large-cap growth stocks and listed in order of size, Apple (AAPL), Alphabet (GOOGL), Microsoft (MSFT), Facebook (FB), and Amazon (AMZN), has been nearly impossible.
A strong performance by the largest stocks spurred investors, speculators, and fund managers to allocate to these equities in ever-greater quantities, creating a self-reinforcing circle of buying exacerbated by the continued inflows into passive index funds and ETF funds.
So what is an investor to do?
The answer is that it may finally be time to step outside the black hole that is consuming a disproportionate amount of investor’s capital. Simply avoiding shares of AAPL, which I was bullish on previously, GOOGL, MSFT, FB, and AMZN could be one-key to investment outperformance over the next decade.
Thesis
The largest companies have consumed investor capital at an ever-increasing pace, forcing more and more investment managers to become closet indexers, closing active investment strategies, and creating a bigger opportunity for the remaining active investors.
The Five Biggest Are the Primary Culprits
Apple, Alphabet, Microsoft, Facebook, and Amazon have had extraordinary performance in 2017. AAPL shares are up 30% year-to-date, GOOGL shares have gained 21%, MSFT shares are up 19% in 2017, FB shares lead the pack with a remarkable 50% year-to-date gain, and AMZN shares are up a strong 36% even after their minor stumble Friday.
