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Bill Gates once wrote about an exercise he did with Warren Buffett in Harvard's Business Review--
https://hbr.org/1996/01/what-i-learned-from-warren-buffett
"He asked good questions and told educational stories. There’s nothing I like so much as learning, and I had never met anyone who thought about business in such a clear way. On that first day, he introduced me to an intriguing analytic exercise that he does. He’ll choose a year—say, 1970—and examine the ten highest market-capitalization companies from around then. Then he’ll go forward to 1990 and look at how those companies fared. His enthusiasm for the exercise was contagious. I stayed the whole day, and before he drove off with his friends, I even agreed to fly out to Nebraska to watch a football game with him."
He added, "When you are with Warren, you can tell how much he loves his work. It comes across in many ways. When he explains stuff, it’s never “Hey, I’m smart about this and I’m going to impress you.” It’s more like “This is so interesting and it’s actually very simple. I’ll just explain it to you and you’ll realize how dumb it was that it took me a long time to figure it out.” And when he shares it with you, using his keen sense of humor to help make the point, it does seem simple."
This seems like an interesting exercise indeed.
A company can leap into the top 10 in two ways: they hype of future prospects and over pricing, or slowly and steadily through performance. To get a sense of the prevalence of overvalued stocks and how their prices adjust, let's look at the last 60 years.
Let's look at the market caps of the largest companies since 1960's.
| 1960 | 1965 | 1970 | 1975 | 1980 |
| AT&T | AT&T | IBM | AT&T | IBM |
| General Motors | General Motors | AT&T | IBM | AT&T |
| DuPont | Exxon | General Motors | Exxon | Exxon |
| Exxon | IBM | Eastman Kodak | Eastman Kodak | General Motors |
| General Electric | Texaco | Exxon | General Motors | Amoco |
| IBM | Dupont | Sears Roebuck | Sears Roebuck | Mobil |
| Texaco | Sears Roebuck | Texaco | IBM | General Electric |
| Union Carbide | General Electric | Xerox | General Electric | Chevron |
| Eastman Kodak | Gulf Oil | General Electric | Amoco | Atlantic Richfield |
| Sears Roebuck | Eastman Kodak | Gulf Oil | Chevron | Shell oil |
| 1980 | 1990 | 1997 | 1998 | 2000 |
| IBM | Nippon Telegraph & Telephone | General Electric | Microsoft | Microsoft |
| AT&T | Bank of Tokyo-Mitsubishi | Royal Dutch Shell | General Electric | General Electric |
| Exxon | Industrial Bank of Japan | Microsoft | Exxon Mobil | NTT DoCoMo |
| Standard Oil | Sumitomo Mitsui Banking | Exxon Mobil | Royal Dutch Shell | Cisco |
| Schlumberger | Toyota Motors | The Coca-Cola Company | Merck | Walmart |
| Shell | Fuji Bank | Intel Corporation | Pfizer | Intel |
| Mobil | Dai-Ichi Kangyo Bank | Nippon Telegraph & Telephone | Intel | Nippon Telegraph & Telephone |
| Atlantic Richfield | IBM | Merck | The Coca Cola Company | Exxib Mobil |
| General Electric | UFJ Bank | Toyota Motors | Wal-Mart | Lucent |
| Eastman Kodak | Exxon | Novartis | IBM | Deutsche Telecom |
| 2001 | 2002 | 2004 | 2006 | 2007 |
| General Electric | Microsoft | General Electric | Exxon Mobil | Exxon Mobil |
| Microsoft | General Electric | Exxon Mobil | General Electric | General Electric |
| Exxon Mobil | Exxon Mobil | Microsoft | Microsoft | China Mobile |
| Wal-Mart | Wal-Mart | Citigroup | Citigroup | ICBC |
| Citigroup | Pfizer | BP | BP | Microsoft |
| Pfizer | Citigroup | Wal-Mart | Bank of America | Royal Dutch Shell |
| Intel Corporation | Johnson & Johnson | Royal Dutch Shell | Royal Dutch Shell | Gazprom |
| BP | Royal Dutch Shell | Johnson & Johnson | Wal-Mart | AT&T |
| Johnson & Johnson | BP | Pfizer | Toyota | CitiGroup |
| Royal Dutch Shell | IBM | Bank of America | Gazprom | Bank of America |
| 2008 | 2009 | 2010 | 2018 | 2020 |
| Exxon Mobil | Exxon | PetroChina | Apple | Microsoft |
| PetroChina | PetroChina | Exxon Mobil | Amazon | Apple |
| ICBC | ICBC | Microsoft | Microsoft | Amazon |
| Microsoft | Microsoft | ICBC | Google/Alphabet | Google/Alphabet |
| HSBC | HSBC | Walmart | Berkshire Hathaway | Alibaba Group |
| China Mobile | China Mobile | China Construction Bank | ||
| Wal-Mart | Wal-Mart | BHP Billiton | Alibaba | Tencent |
| Petrobras | Petrobras | HSBC | Tencent | Berkshire Hathaway |
| China Construction | China Construction | Petrobas | JP Morgan Chase | Visa |
| Royal Dutch Shell | Royal Dutch Shell | Apple | Johnson & Johnson | Johnson & Johnson |
What stands out immediately is 1990. Japan had companies that filled the top 10 before they imploded due to hype.
What's interesting is that the most profitable companies or the companies with the most revenue may not have their earnings reflected in the market capitalization.
In 1960, the top 10 most profitable companies in the U.S included U.S Steel, Esmark, Texaco, Mobil, Chrysler, and Gulf Oil. Yet, these companies were not on the list during that year.
Over the last twenty years, there has been a lot of turnover in the top ten firms by market capitalization. Oil and energy companies, tech companies, telecom companies, car companies all quickly rose to relevance and disappeared into obscurity. Turnover in the top companies, measured by fundamentals and financials rather than by popularity and trading volume, happens at slower and more gradual pace.
There were many oil companies who made it to the top of the list such as Exxon, PetroChina, Shell, Texaco, but they didn't last more than a decade.
Petrobas, the Brazilian petroleum company eventually privatized. Exxon and Mobil had a merger.
Exxon had also grown dramatically through support of the U.S. government. Exxon Mobil Corporation PAC contributed significant amounts of money to candidates during election cycles.
Relationships with Dick Cheney(Halliburton) and former President George W. Bush (Arbusto Energy) proved beneficial in international business, particularly in places such as Indonesia, Equatorial Guinea, Nigeria, and Chad.
It's also interesting how General Motors and Kodak were both at the top of their respective fields and eventually went bankrupt. General Motors has a high return on capital back in the day, which makes me think about car companies in Korea and China.
Automobile companies in developing countries may be earning a high return on capital now, will this eventually dwindle? A lot of car buyers in China are first time buyers, but eventually everyone will have their own car, and demand won't be as high as before. How long will Geely Automobile, Kia, Hyundai, Tesla, or new automobile companies, last? The automobile industry is an incredibly difficult industry.
Kodak didn't pivot fast enough, and the digital camera killed them. I am surprised that besides Pfizer, I didn't see too many pharmaceutical companies.
It's also amazing how Edison's firm, who got bought out by J.P Morgan and renamed General Electric, would be dominant for so many years, but over diversified and went into financials and other industries. They have had so many ups and downs through various CEO's such as Jack Welsh to Jeffrey Immelt, and rumor has it that they have tried to meet earnings expectations every single time through manipulation. GE is in dire situation now, it has been a long time since they were so dominant.
There were many oil companies who made it to the top of the list such as Exxon, PetroChina, Shell, Texaco, but they didn't last more than a decade.
Petrobas, the Brazilian petroleum company eventually privatized. Exxon and Mobil had a merger.
Exxon had also grown dramatically through support of the U.S. government. Exxon Mobil Corporation PAC contributed significant amounts of money to candidates during election cycles.
Relationships with Dick Cheney(Halliburton) and former President George W. Bush (Arbusto Energy) proved beneficial in international business, particularly in places such as Indonesia, Equatorial Guinea, Nigeria, and Chad.
It's also interesting how General Motors and Kodak were both at the top of their respective fields and eventually went bankrupt. General Motors has a high return on capital back in the day, which makes me think about car companies in Korea and China.
Automobile companies in developing countries may be earning a high return on capital now, will this eventually dwindle? A lot of car buyers in China are first time buyers, but eventually everyone will have their own car, and demand won't be as high as before. How long will Geely Automobile, Kia, Hyundai, Tesla, or new automobile companies, last? The automobile industry is an incredibly difficult industry.
Kodak didn't pivot fast enough, and the digital camera killed them. I am surprised that besides Pfizer, I didn't see too many pharmaceutical companies.
It's also amazing how Edison's firm, who got bought out by J.P Morgan and renamed General Electric, would be dominant for so many years, but over diversified and went into financials and other industries. They have had so many ups and downs through various CEO's such as Jack Welsh to Jeffrey Immelt, and rumor has it that they have tried to meet earnings expectations every single time through manipulation. GE is in dire situation now, it has been a long time since they were so dominant.
In 2019, the largest market capitalization were
| In USD | Market Cap | Revenue | Net Profit | FCF | ||
| 1 | Saudi Aramco | 2T | 319B | 95B | 87B | 23x |
| 2 | Apple | 1T | 260B | 55B | 60B | 18x |
| 3 | Microsoft | 1.2T | 125B | 40B | 35B | 34x |
| 4 | Amazon | 916B | 280B | 12B | 20B | 57x |
| 5 | Alphabet Google | 900B | 162B | 34.3B | 30B | 28x |
| 6 | 585B | 70B | 20B | 20B | 29x | |
| 7 | Alibaba | 569B | 53B | 24B | 17B | 29x |
| 8 | Berkshire Hathaway | 553B | 43B | 30B | 25B | 20x |
| 9 | Tencent | 461B | 52B | 10B | 17B | 35x |
| 10 | JP Morgan Chase | 345B | 110B | 36.4B | 15B | 6x |
| 11 | Bank of America | 300B | 81B | 50B | 60B | 5x |
| 12 | ICBC (Industrial Commercial Bank of China | 290B | 96B | 44B | 85B | 6x |
| 13 | Samsung Electronics | 261B | 190B | 17B | 16B | 16x |
| 14 | China Construction Bank | 217B | 76.5B | 37.5B | 64B | 5x |
| 15 | Agricultural Bank of China | 180B | 70B | 30B | Nil | 7x |
| 16 | Bank of China | 130B | 70B | 24B | Nil | 7x |
Saudi Aramco was recently listed, and the market cap shrunk due to recent oil prices. At the time of listing, oil was still $60 per barrel, and they were raking in 110B of profits annually.
To put this in perspective, look at Chevron. The American oil giant has a market capitalization of 221 Billion and generated 15Billion, while Saudi has a market cap 10x of it at 2 trillion and profits 6x bigger at 95 Billion.
To put this in perspective, look at Chevron. The American oil giant has a market capitalization of 221 Billion and generated 15Billion, while Saudi has a market cap 10x of it at 2 trillion and profits 6x bigger at 95 Billion.
From 1995 to 2000, the technology-dominated Nasdaq index increased in value over 5x. At the peak in March 2000, Dell and Cisco placed huge sell orders on stock which started panic selling among investors. Within weeks the market shrunk by 10% and investment capital for tech startups became increasingly scarce. These drops became more entrenched following 9/11 attacks and Enron.
The Dot Com bubble is one way of explaining the change in the landscape of the top 10 market capital firms after 1999. The Dot Com bubble of 1999-2000 was fueled by increasing investments in internet-based companies and rapid growth in technology equity stocks. Some hold the view that the Tax-Payers Relief Act of 1997 primed the market for bullish behavior by encouraging investment in stocks that paid little or no dividend, by investors who were ill-informed on the sector.
As a result, in 1999-- 6 tech companies dominated in the top ten of market capital share, but by 2004 there were only two. Investors became increasingly cautious of the profitability of new tech companies. During the bubble, internet companies that lacked revenue, profit, or even a final product, rushed into IPOs and still tripled or quadrupled in value soon after.
With the market share of tech firms receding, other firms rose to the top. Energy companies General Electric and Exxon became the leaders in market cap value combining for over $600 billion in 2004. GE had experienced a strong run of growth under former CEO Jack Welch, who combated non-profitable GE businesses swiftly by either fixing, selling, or closing.
It is also worth noting that 2009 marked the third occasion Walmart had ranked in the top ten market cap values (189 billion). Walmart enjoyed significant growth as a value retailer alongside its competitors K-mart and Target. The success of the Arkansas based retailer showed that consumers were willing to sacrifice store environment for cheaper prices, something that can be seen continuing in the UK context today.
The success of large value-retailers has also led, however, to what has been called the ‘Walmart effect.’ It is the detrimental impact felt by smaller local businesses when large retailers such as Walmart open in their area. Indeed, they are often driven out of business and local workers suffer from suppressed wages.
The dominant department store such as Sears Roebuck, or the dominant discount retailer such as Walmart, made them a bit short sighted, and did not pivot into online shopping, or did not try to change their business model fast enough, and Amazon slowly gained consumer's trust. Walmart began acquiring online shopping companies a bit too late.
It is also worth noting that 2009 marked the third occasion Walmart had ranked in the top ten market cap values (189 billion). Walmart enjoyed significant growth as a value retailer alongside its competitors K-mart and Target. The success of the Arkansas based retailer showed that consumers were willing to sacrifice store environment for cheaper prices, something that can be seen continuing in the UK context today.
The success of large value-retailers has also led, however, to what has been called the ‘Walmart effect.’ It is the detrimental impact felt by smaller local businesses when large retailers such as Walmart open in their area. Indeed, they are often driven out of business and local workers suffer from suppressed wages.
The dominant department store such as Sears Roebuck, or the dominant discount retailer such as Walmart, made them a bit short sighted, and did not pivot into online shopping, or did not try to change their business model fast enough, and Amazon slowly gained consumer's trust. Walmart began acquiring online shopping companies a bit too late.
It is interesting to note that Alibaba seems a lot more profitable than Amazon despite its smaller revenues, but in terms of cloud computing, Amazon dominates with AWS-- it has operating earnings of 8 billion annually and 33% market share or more. Alibaba's cloud computing segment has 5-6% of market share and an operating loss of 600 million.
Alibaba seems more profitable due to its outsourcing of logistics to CaiNiao, it doesn't own its warehouses, but it owns shares in some of the warehouses it partners with and doesn't list these expenses on the income statement or additional inventory in the balance sheet.
Amazon is vertically integrated in terms of warehouse and logistics, and they can squeeze margins out by being more efficient. Alibaba’s platform has led to increasing copy-cats, such as JD.com, PingDuoDuo, which will inevitably erode operating margins.
Alibaba’s success originally came from B to B and connecting the world to manufacturers and has morphed into bringing small family retailers to an ever-growing online Chinese consumer base. Alibaba is different from competitors such as Amazon because it includes TaoBao, which is parallels Ebay which charges no listing fee, and it has another platform, Tmall, which does charge a listing fee. Alibaba seems to want to be more diversified, but has produced operating losses in media such as youku (an equivalent of youtube), cloud, etc.
What's interesting is that one of Amazon's moonshot projects paid off. I understand Bezo's has had many failed projects, but he was earlier than everyone to get into Cloud computing and it has become a staple part of its business. Amazon prime, Kindle, are all projects which re-enforce its business model. While Google's moonshot projects hasn't produced too much for shareholders yet. Google Maps, the Chrome browser, do help its search engine, and Android was a great acquisition that added value, but Calico, their life extension project, and various others seem beneficial to society, but may not see a return on investment. I may be wrong. Only time will tell.
Tencent has a lot of sticky killer applications such as WeChat, which has penetrated every Chinese citizen. It's a version of whatsapp on steriods which allows for payment, bookings, etc. They took away market share from Alipay through the introduction of RedPacket HongBao money by enticing new users and cooperating with different merchants. They also have QQ, and various outlets which helps them build a large network to advertise and sell services.
However, a large part of earnings comes from video games, which they are very successful at, including a shooter called PUGB, but video games are like women's fashion; once the trend wears off, it could be hard to catch up with the next great thing.
One thing I've noticed is the overpricing of listed companies in America versus any other exchange. ICBC seems ridiculously cheap, but I haven't researched it enough to warrant a conclusion, it might have risky non-performing loans, or other unknowns. Samsung, being listed in Korea, only has a market cap of 261B, while Amazon has a market cap of 916B, there earnings aren't too far off, but the market gives Amazon a bigger valuation.
It's interesting how many Chinese State owned banks made the list, but I haven't done enough research and haven't read their annual reports to know how safe these banks are.
It's interesting how many Chinese State owned banks made the list, but I haven't done enough research and haven't read their annual reports to know how safe these banks are.
Another notable trend was the emergence of financial companies into the top ten market caps of 2004. These include Citi, AIG, and Bank of America-- none of which would still reside within the top ten just five years later.
AIG was infamously bailed out by the US government following the 2008 financial crisis, having fallen into the lucrative trap of credit default swaps. AIG was forced to make good on coverage despite defaults and suffered upwards of $25 billion in losses. Deemed ‘too big to fail’, AIG was given more than 150 billion in bailout.
AIG was infamously bailed out by the US government following the 2008 financial crisis, having fallen into the lucrative trap of credit default swaps. AIG was forced to make good on coverage despite defaults and suffered upwards of $25 billion in losses. Deemed ‘too big to fail’, AIG was given more than 150 billion in bailout.
With lost confidence in major American firms, investors shifted towards several Chinese companies including ICBC, China Mobile, and Chinese Construction Bank.
ICBC set the record for the largest IPO at the time when it went public in October 2006 appearing on both the Hong Kong and Shanghai Stock Exchanges. In 2008, it became only the second Chinese bank since 1991 to gain federal approval for a branch in New York City. Furthermore, it had three key investors- American Express, Dresdner, and Goldman Sachs.
China Construction Bank (CCB) was also listed in the top ten with a market cap of $182 billion in 2009. Similar to ICBC, it benefited from large initial investments by American banks. For example, in 2005 Bank of America owned $44.7 billion shares of the company, equivalent to a 19% stake. Foreign banks aimed to gain access to the growing Chinese consumer population through their investments.
Over time, however, foreign banks reduced their positions, and in 2013 Bank of America became the second bank (behind Goldman Sachs) to fully leave CCB. One driving factor was the Dodd Frank Act, which required large financial companies to conduct annual stress tests. Off-loading shares helped companies to increase their capital holdings in line with new legislation.
Looking at these charts, I can't help but think, is it possible for an investor to always be clairvoyant enough to pick the winners in innovation? Union Carbide was replaced by gulf oil. DuPont was replaced in 1970 by Xerox. Due to technology, notice that the pace of change for the top 10 market capitalization companies are changing. I don't think it is possible. I don't blame Buffett for missing out on Amazon and Google. The rearview mirror is always clearer than what lies ahead.
If we judge companies by profits, dividends, sales, you would have other companies on the list. But in that list is also fraught with risk and quick dips. WorldCom was the consequence of Fraud, and Fannie Mae and AIG from aggressive accounting. There are also many non-listed companies such as Koch Industries, Cargill, etc who might make the list.
Moving to 2014, several energy companies again listed within the top ten market caps. Exxon and Shell were particularly strong with PetroChina briefly having the largest market cap of all companies. Their decline (none listed in 2019) was partly driven by the oil crises occurring during the decade. Putin and the middle east are trying to squeeze natural gas out of the game by gaining market share through increasing production to a point where it would be detrimental for producers.
Oil has always been subject to booms and busts. In 2015, oil price declined in large part due to the strengthening of the U.S dollar. In 2015, the Energy Information Administration also reported that the U.S. commercial crude oil inventories had reached nearly 500 million barrels, the highest inventory level in 80 years.
The introduction and widespread adoption of fracking, alongside the vast reduction in its associated extraction costs has further increased supply and suppressed prices. The geographic distribution of shale oil extraction has rendered the companies who extract it subject to more stringent competition regulation, thereby reducing the ability of parties to fix prices.
The introduction and widespread adoption of fracking, alongside the vast reduction in its associated extraction costs has further increased supply and suppressed prices. The geographic distribution of shale oil extraction has rendered the companies who extract it subject to more stringent competition regulation, thereby reducing the ability of parties to fix prices.
The strong dollar and increased supply was coupled with weakening demand due to stagnating European economies and China’s economic struggles (China was the largest oil importer at the time). The result was a 70% decline in real oil prices from mid-2014 to early 2016. Altogether, these factors help explain energy companies’ drop from the top ten rankings in 2019.
2019 marks the re-emergence of tech, which occupies seven of the top 10. The digital advertising industry, including the likes of Google/Alphabet and Facebook, has become increasingly dominant. Google re-organised itself in 2015 as a subsidiary of Alphabet, with the intention of expanding outside internet search and advertising. Nevertheless, advertising for Google properties (Maps, YouTube, Play) and Google Network Members comprise 85% of Alphabet’s total revenue. Similarly, 98.5% of Facebook’s revenue comes from advertising.
In 2019, digital ad spending in the U.S surpassed traditional media ad spending and is expected to increase moving forward. This reflects consumer adoption of online platforms. However, some are increasingly worried to the invasive nature of online ads against personal data privacy, but my opinion is, human nature won't change to media addiction and dependency on instant gratification.
My personal opinion is that there's so many consumers on their phones and computers each day, and some advertising requires either bidding or pay per click, both Google and Facebook will be an agent for big corporations, which is same with cable T.V advertising back in the day. The big companies such as P&G, General Mills, have the advertising budget and they create a viscous cycle by making their brand even more dominant among consumers. However digital advertising is a fad and a bubble, and I think investors would be wise to avoid it.
Do I think artificial intelligence and block chain are beneficial to society? Yes. Are there too many investors pouring money in these "hot" categories? Yes. If so, will these companies be over valued? Yes. Are there companies who can generate the same consistent cash flows for at a lower market cap? Yes.
My personal opinion is that there's so many consumers on their phones and computers each day, and some advertising requires either bidding or pay per click, both Google and Facebook will be an agent for big corporations, which is same with cable T.V advertising back in the day. The big companies such as P&G, General Mills, have the advertising budget and they create a viscous cycle by making their brand even more dominant among consumers. However digital advertising is a fad and a bubble, and I think investors would be wise to avoid it.
Do I think artificial intelligence and block chain are beneficial to society? Yes. Are there too many investors pouring money in these "hot" categories? Yes. If so, will these companies be over valued? Yes. Are there companies who can generate the same consistent cash flows for at a lower market cap? Yes.
There have been tech booms and oil crashes, bull and bear markets, and periods of retail dominance. However, two companies which have been models of consistency (at least in regard to market cap) are Microsoft and Johnson & Johnson.
Microsoft has appeared in the top 10 market cap rankings for the last twenty years. Of the current big five tech companies, it has maintained the most diverse revenue portfolio. Microsoft has had a surprisingly long and consistent dominance despite not being the dominant operating system in mobile phones. They compensated by being the number 2 player in cloud computing.
Similarly, Johnson & Johnson has listed in the top ten for the last ten years and it also benefits from three large revenue streams- pharmaceuticals, healthcare, and medical devices. While other companies seem to come and go, these two have stood the test of time. General Electric has a period of dominance, but fell off a cliff.
How long will Berkshire Hathaway stay at the top rankings? Will Berkshire beat the S&P in the next decade (2020-2030)? If it can't, allocate capital effectively, will there be a dividend? Time will tell.
"Our main business is not to see what lies dimly at a distance, but to do what lies clearly at hand."
- Thomas Carlyle
Microsoft has appeared in the top 10 market cap rankings for the last twenty years. Of the current big five tech companies, it has maintained the most diverse revenue portfolio. Microsoft has had a surprisingly long and consistent dominance despite not being the dominant operating system in mobile phones. They compensated by being the number 2 player in cloud computing.
Similarly, Johnson & Johnson has listed in the top ten for the last ten years and it also benefits from three large revenue streams- pharmaceuticals, healthcare, and medical devices. While other companies seem to come and go, these two have stood the test of time. General Electric has a period of dominance, but fell off a cliff.
How long will Berkshire Hathaway stay at the top rankings? Will Berkshire beat the S&P in the next decade (2020-2030)? If it can't, allocate capital effectively, will there be a dividend? Time will tell.
"Our main business is not to see what lies dimly at a distance, but to do what lies clearly at hand."
- Thomas Carlyle
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