Large and In Charge? Why to Think Twice Before Chasing Only Big Stocks | How to Invest

Summary

This video discusses the concept of top stocks, focusing on market capitalization and the impressive performance of leading companies over time. It highlights the historical success of top stocks, like IBM and its innovations, while also examining the impact of technology on stock returns. The conversation touches on the unpredictable nature of stock performance, with top stocks outperforming the market at times and underperforming at others. The discussion emphasizes the importance of diversification and the role of technological advancements in shaping successful businesses, with examples like NVIDIA and Ross Dress for Less showing the diverse nature of top-performing stocks.

Takeaways

• 😀 Top stocks are typically defined as those with the largest market capitalization, calculated by multiplying the number of shares by the stock price.
• 😀 Market capitalization reflects how much the market values a company, with larger companies considered more valuable.
• 😀 Historical analysis shows how the largest companies evolve over time, with examples from 1930 to 2025 highlighting the changes in top stocks.
• 😀 Strong performance is necessary for a company to become a top stock, as seen in the impressive returns of top companies over the last five years.
• 😀 While top stocks can deliver strong returns, it's important to remember that market performance is often driven by a subset of stocks, not the entire market.
• 😀 Technology companies have been the dominant drivers of market returns in recent years, with innovations from companies like Amazon resembling older models like Sears Roebuck.
• 😀 IBM's historical performance shows that even with significant innovations (e.g., programming languages, hard drives, AI), the company’s stock returned market-like results over a 50-year period.
• 😀 Achieving and maintaining top stock status is difficult due to competition, innovation, and management decisions that can affect a company's long-term growth.
• 😀 Investing in a diversified portfolio, rather than focusing solely on top stocks, is a strategic way to capture growth across various sectors and industries.
• 😀 Historical comparisons, such as between Microsoft and Ross Dress for Less, show that even non-tech companies can deliver market-beating returns when they effectively leverage technology.
• 😀 The recent performance of stocks like NVIDIA (up almost 150,000% in 25 years) highlights the potential rewards of investing in top companies, but also shows that high returns are not guaranteed for every company.

Q & A

What does 'top stock' mean?

A 'top stock' refers to companies with the largest market capitalization, which is calculated by multiplying the number of shares by the stock price. It represents the value the market assigns to a company.

How is market capitalization calculated?

Market capitalization is calculated by multiplying a company's share price by the total number of shares outstanding. This gives the total value of the company according to the stock market.

Why is it important to focus on performance to become a top stock?

Performance is crucial because strong returns over time demonstrate a company's growth and stability, which increases its market capitalization and positions it among the top stocks.

What was the market performance of top stocks in the last five years?

The top stocks have shown fantastic performance over the last five years, indicating that strong performance is essential for a company to maintain its position as a top stock.

What role do tech companies play in market returns?

Tech companies, especially a few key players often referred to as 'MAG 7,' have significantly driven market returns. Their innovations and strong performance have propelled the market forward.

How does the performance of companies like Amazon relate to historical companies like Sears?

Both Amazon and Sears have similar business models, as Sears used to deliver products directly to customers a century ago, similar to Amazon today. However, Amazon's technology has made the process much more efficient and scalable.

What are some innovations introduced by IBM that impacted society?

IBM introduced many innovations such as programming languages (FORTRAN, COBOL), magnetic tape storage, mainframe computers, personal computers, AI (Deep Blue), and more. These innovations have had a significant impact on various industries.

Why did IBM’s stock performance not match its innovations?

Although IBM introduced groundbreaking innovations, its stock performance was market-like due to high market expectations and competition. The company's stock price had already priced in future growth, and despite strong innovations, it faced challenges in maintaining high returns.

What lesson can be drawn from IBM’s long-term performance as a top stock?

The key takeaway from IBM’s performance is that being a top stock for a long time does not necessarily guarantee exceptional returns. Sustaining top status is challenging due to competition, changing market conditions, and high expectations.

What is the benefit of diversifying a stock portfolio?

Diversification allows investors to capture the strong performance of top stocks without relying on one company. By owning a mix of stocks from various sectors, investors can benefit from growth in both tech and non-tech companies.