The Pitfalls of Solely Investing in the Largest Stocks

When companies get big and become some of the most valuable on the stock market, it’s usually seen as a big achievement. But here’s something interesting: after they reach this top status, these companies often don’t do as well compared to how they were doing before.

Looking at almost a hundred years of data from 1927 to 2022, it’s clear that they were doing amazingly well before these companies became part of the Top 10 most valuable ones. Profits were high, growing by more than 25% compared to the rest of the stock market in the three years before they joined the Top 10.

But after they become these big shots, something changes. Five years after reaching the top, these companies usually start doing worse than the rest of the stock market. And after ten years, they’re even further behind.

So, why does this happen? There are a few ideas about why this might be the case:

1. It’s Hard to Keep Growing: When companies get really big, it’s tough for them to continue growing as fast as they did when they were smaller. Finding new ideas and ways to keep growing becomes harder.

2. Too Much Expectation: When a company becomes successful, everyone expects them to keep doing amazing things. This can make the company’s stock price go way up, even if it’s not actually doing as well as people think. Then, when people realize the company can’t meet those high expectations, the stock price may fall.

Remember, only some of the biggest companies face this problem. Every company is different, and many things can affect their performance in the stock market.

So, while becoming a big company is great, staying at the top and doing well for a long time is tough. The fact that many big companies start doing worse after becoming top dogs is a reminder that it takes work to stay successful in the ever-changing stock market. Therefore, as an investor, it is important to remember this before investing only with the biggest companies out there and expecting high returns.

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