Did you know: Apple, Google, Microsoft, Amazon


On April 2009 the market capitalization of Apple, Google, Amazon, and Microsoft stood at $74 billion, $92 billion, $26 billion, and $135 billion respectively. Their combined market capitalization was $327 billion. Nine years later these four companies have grown to become the largest in the world, with a combined market capitalization of over $3.2 trillion – surpassing the usual suspect sectors like banks, oil companies and defense industries.

These mega companies are all key components of the Nasdaq index, a favourite among investors and leader of the equity rally of the last few years. Glancing at returns, it’s easy to see why. The index is in for its 10th consecutive positive year – a new record – surpassing the epic run from 1991 to 1999!

While records are made to be broken, returns like those we have experienced the last decade are unsustainable. If the Nasdaq is to repeat its past 9-year performance of 23.8% annualized in the next nine years, large cap tech stocks would own the world. While that may be possible, it’s not probable.

In the years to come we’re much more likely to see returns come down as they did following the 1990’s boom. That doesn’t mean they have to crash in the same dramatic way, just that the high rate of growth is unlikely to persist. So how should investors think about unsustainable returns, in any asset class or strategy and volatility in particular? With a high degree of scepticism.

We are advocates that one should operate under the assumption that such returns will not continue indefinitely but instead succumb to the law of mean reversion. For an existing investor, that means humbly rebalancing your portfolio to increase diversification and control risk. For a prospective investor, that means setting low expectations and dipping his toes in only with a high degree of caution. Since you cannot buy past returns those should have no influence on your decision-making process. Focus instead on the future and your best assessment of prospective returns.

This is easier said than done. In the five years leading up to the peak in March 2000, the Nasdaq generated an annualized return of over 60%. While it seems absurd in hindsight, many investors at the time were expecting these returns to actually continue. What happened next? An 83% decline to its ultimate low of October 2002. That’s not to suggest a similar fate awaits us. The high returns and valuations in this cycle seem tame in comparison to the 1990’s bubble. But compared to anything else, they seem unsustainable high and investors would be wise to understand that fact and act accordingly.