We believe that two keys to long term returns are diversification and buying something at a reasonable price. We believe history broadly supports those principles.

If you’ve been investing only for the past four or five years, you might draw the opposite conclusion. Narrow and Expensive have been the rules to winning. Especially over the past 18 months.

We’ve written a lot about what’s going on. Fed policy to keep rates low, anemic global growth, and seemingly bullet-proof cash flow margins have pushed investors almost exclusively into Big Tech in the US. All other major public investments have lagged.

The simple question we address today—through four charts—is whether a strategy of buying only the biggest group of stocks is a winning strategy over time.

Chart One

The challenge for investors today is that “defensive big tech” is the most expensive part of the market

Chart Two

The Big Six vs. 494 (The Rest): A Tale of Two Worlds

Six, very large tech stocks are driving returns for the past five years.

We currently own two of them, but they don’t represent the outsized weighting in the portfolio that they do in the index.

Owning the other 494 stocks would be producing inferior returns right now.

Chart Three

Those six stocks have outsized presence—their combined market cap is bigger than all individual country stock markets except for that of China

Chart Four

Longer term, investing only in the “Top Dogs” has led to inferior returns

 

BOTTOM LINE

While Going Big has worked over short recent history, a broader view highlights that buying the biggest stocks for a given year does not tend to produce superior long-term returns. In our view, most investors buy too late and do not capture reasonable returns.

The upshot is that, today, it is as important as ever to have a principled approach to investing. Don’t chase the obvious winners. Build diversified portfolios. Buy what you perceive to be companies with good balance sheets at reasonable prices.

Success requires patience. Which, along with diversification and reasonable price, is yet another key to long term success in investments.

Past performance is no guarantee of future results, and CornerCap’s strategies, like most investment strategies, involve the risk of lossDifferent types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable.  All investors are advised to fully understand the risks associated with any kind of investing they engage in.