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When I started out as an inexperienced investor, I thought that the S&P 500 was for old people, just like dividends. I wanted to invest in the upcoming companies that were changing the world. Little did I know, the tech boom was coming to an end. All those high flying stocks would soon become worthless. In 1998, in regards to investing in technology companies, Warren Buffett said, “The answer is no, and it’s probably unfortunate. I don’t know what that world will look like in 10 years, and I don’t want to play in a game where the other guy has an advantage over me.”
Warren Buffett’s right hand man Charlie Munger even said, “Whatever you think you know about technology, I probably know less.”
I remember thinking at the time, Warren Buffett is a dope. He needs to learn quickly because the world is becoming more technology-reliant by the day. I was only half right. While the world is becoming more technology-heavy by the day, Warren Buffett is correct when he says that it’s hard to know what the world will look like in 10 years.
Do you realize that the iPhone debuted 9 years ago, in June 2007. I remember when the Motorola RAZR came out and how “hot” that looked. I thought nothing would top the slickness and design of the RAZR. However three years later, the iPhone debuted. Can you imagine not having a smartphone today? Yet, 10 years ago, this technology didn’t even exist.
What’s even crazier is when Warren Buffett said that quote in 1998, he was 100% correct. There is no way people could have determined that they would have a computer in their hand that would also be able to make phone calls, play games, and check what all of your friends were up to on Facebook. The speed and direction of technology moves so rapidly.
SpaceX is another company that I never saw coming. Who would have thought that we could use reusable rockets to send satellites into space. SpaceX launched the first private rocket into space in 2008 and in 2015, the first reusable rocket.
The defense contractors like Lockheed must have been blindsided. As entrenched as they are and with all their funding, how could they not have thought about a reusable rocket? Maybe they were content with knowing exactly how to get by and get paid by the government, so they might have lacked interest in further innovation. They must be shaking their heads now because SpaceX is about to eat their lunch.
If technology can evolve so rapidly, how do you know that an industry that you know so well won’t also morph in the blink of an eye. One thing that I don’t understand is how individuals think they can be a better long term stock picker than the benchmark against the S&P 500. While I agree there are a small subset of investors that can foresee the future and can beat the market. The average investor does not consistently beat the market.
If you don’t believe me, let’s look at some of the data. Remember in the 1990’s when the dot.coms really began to flourish? Would you have picked winners like Amazon, Apple, Google and Facebook at that point? Probably not. More than likely you would chosen duds like Pets.com, Garden.com and Webvan. Hindsight is always 20/20.
Once a Winner Always a Winner?
So let’s explore this for a little bit. If a company was a winner in one decade, it should continue to flourish moving forward, right?
Let me share with you the top performing stocks from the 1990’s. As you can see in the 2000’s, 17 out of the 25 stocks failed to beat the S&P 500. In the 2010’s, 16 out of the 25 stocks failed to beat the S&P 500. There were only 3 stocks out of 25 that beat the S&P 500 in the 2000’s and 2010’s. That means that 88% failed to beat the S&P 500 consistently over 20 years.
|Company||1990’s Change||2000’s Change||2010’s change||Beat S&P 500|
|Sun Microsystems||7070%||-94%||Purchased by Oracle||No|
|Altera||5663%||-9%||Bought by Intel||No|
|Novellus Systems||3451%||-40%||Acquired by Lam Research||No|
Here are the top stocks for the 2000’s. As you can see below 18 out of the 25 stocks fail to beat the S&P 500 over the next decade. It appears that the patterns above show that it’s difficult for top performing stocks to continue to beat the beat market.
|Company||2000’s Change||2010’s change||Beat S&P 500|
|Green Mountain Coffee Roasters||9210%||297%||Yes|
|Hansen Natural Company||7022%||19%||No|
|Bally Technology||5974%||100% acquired in 2014||Yes|
|Deckers Outdoor Corp||3775%||-25%||No|
|XTO Energy||3237%||Acquired in 2010||Yes|
|Joseph A. Banks||3196%||Acquired in 2014||No|
|Sirona Dental Systems||2599%||256%||Yes|
|Central European Media Services||2598%||-90%||No|
|Terra Industries||2396%||Acquired in 2010||Yes|
|CKX Inc||2354%||Acquired in 2011||No|
|Central European Distribution||1817%||-99%||No|
Some may be thinking that surely you could pay a mutual fund manager to figure out where technology is going. According to research conducted by financial advisor Aye Soe from 2012 to 2016, only 0.3% of mutual fund companies remained in the top quartile. This means 99.7% of the top performers in 2012 remained a top performer 5 years later. This is a remarkable stat showing just how difficult it is to pick winners and losers.
While it may be fun selecting potential winners in your stock portfolio, the odds of you picking the right stock is not in your favor. I personally don’t recommend picking out stocks, but of course there are a small percentage of investors who can defy the odds.