The Trillion Dollar Trail

July 12, 2018


Back in 1997, the largest stock in the world as measured by market cap was General Electric (GE).  GE was the darling of the Dow and absolute conglomerate.  According to the Financial Times, GE was then worth almost $223 billion.  If we simply took that market cap and grew it by the same rate as the US economy, GE’s market cap would now be over $500 billion.

Of course, we know that’s not true.  Recent history has not been kind to GE, eventually leading to its removal from the Dow Jones Industrial Average.  GE’s market cap is now just $116 billion as of the beginning of July.  The future that was predicted back in 1997 is much different than reality turned out to be.

Today, we are in another time of prediction.  The largest stock in the index is Apple.  In fact, it’s been the largest since 2012.  Now Apple is on its way to a trillion-dollar market cap.  Its price hit a peak on June 7th, leaving it within 5% of the heralded mark.  Beyond Apple, Amazon, Google (Alphabet), and Microsoft each top $750 million leaving them all conceivably within reach of a trillion if the stellar tech performance continues.

It’s easy to continue to predict that these companies will be dominant and tech will continue to forever change the world.  But it’s important to think about this in investment terms, not betting terms.  Back in 1997, GE could have been a no brainer investment as well – big, diversified, and changing the world.  However, making that investment bet would have looked like this:

Data from 9/30/1997-6/30/2018

You basically parked your money in GE for 20 years while the stock market enjoyed great growth.  Sure, GE continued to outperform the S&P 500 for a while, but by the financial crisis, that lead was fully erased and as of now, the missed opportunity gap is massive.

This is the trouble with individual stocks.  They all have a story and they all have their time in the sun.  However, so far, not one of them remained the shining star forever.  This is exactly why it is important to diversify.  The S&P 500 is one blunt instrument to diversify within big US stocks.  The advantage here versus a single stock is that you get the returns of all the stocks, and that one big stock (GE, Apple, etc.) is still part of the portfolio.  So, if it does well, great, you capture some upside.  But if it falters, it’s not a huge bet.

Furthermore, the S&P 500 has outperformed the economy as well.  The economy (GDP) during that stretch grew 130% versus 324% for the market, so by investing more broadly, you captured real returns over time.  This is what builds, preserves, and creates wealth.  Take that concept even further, and you can do more.  The S&P 500 is just that, 500 big US stocks.  If you expand your portfolio to have small stocks, foreign stocks, and other elements, you can get both growth and diversification over time that truly adds up.  This is what we are always looking to do.

It will forever be tempting to make a bet.  To keep riding the horse that has always won.  Apple (or some of the other big tech companies) may very well continue to dominate and hit a trillion.  However, wealth is far too important to operate on that type of bet, or an “it’s different this time,” mentality.

See Disclosures

The S&P 500 Index is widely regarded as the best single gauge of the U.S. equities market, this world-renowned index includes a representative sample of 500 leading companies in leading industries of the U.S. economy.