No. of Recommendations: 6
Maybe bigger IS statistically better.
Well, it's a fair thing to question, but history and theory are quite clear: probably not.
The biggest 5 stocks by market cap are likely to be quite bad bets on average through the decades based on experience. For example, in the 31 years 1986-2016 inclusive, a portfolio of the biggest 5 by market cap underperformed the S&P 500 (of which they form a large part!) by 3.53%/year in total return. That's a pretty big observation.
And also on theory: if all stocks vary in valuation level between over and undervalued over time, the order of market cap gets shuffled somewhat away from the order you'd get on pure absolute intrinsic value. Undervalued things slide down the list, overvalued things move up while it lasts. The ones at the top by market cap will be, statistically, ones that got shuffled upwards in the list order due to transient overvaluation.
So, other than recent results in the last decade, I personally wouldn't want to bet the other way because I'm more the type to go with theory and history. Of course, maybe corporate concentration will soar some more and the biggest will just keep getting bigger, even faster than the small get big. We'll all work for the surveillance capitalists in another few years--who knows? But barring that, which has a pinch of the "it's different this time" reasoning to it, there is no reason to think the biggest are a better bet than the others, and in fact some pretty good reasons to think they're worse.
Jim
