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> The largest market cap companies in a given decade, overwhelmingly tend to be under-performers in the following decade.

Yes, sometimes it's important to remind people of the efficient-market hypothesis:

https://en.wikipedia.org/wiki/Efficient-market_hypothesis

You can't beat the market buying stocks using publicly available information, because everybody else knows everything you do. The average seller has no reason to sell you the stock for less than it's worth.

The only way to beat the market without random chance is to know something everyone else doesn't.

It's also important to remember that is a hypothesis, not a fact.

Right. Just buy the S&P 500. Tech companies aren’t the only ones automating.

Ironically (considering all the prognostication) one of the main examples you cite is factually incorrect.

which is what happened to Microsoft, stagnating its stock for ~15 years

Microsoft stock ticker - https://finance.google.com/finance?q=NASDAQ:MSFT

The longest "stagnant" period is directly after the dotcom bust and up to 2007. In that period the stock appreciated by ~10%. Over the following decade it appreciated by ~150%. Not quite the dramatic hockeystick growth curve startup folk like to see, but pretty reasonable for a company already 30 years old at that point. Either way, the quote above has no basis in reality.

No, it wasn't factually incorrect.

December 1999, it hit a high of $59.97.

As recently as November 2016, it was still below that line. Between mid January 2000 and September 2016, it didn't once cross above $59.97 in all of those years in-between.

Go back to as recently as August 2015 and you could find it under $40 still. It was $28 as recently as April 2013.

Even if you didn't want to look up specific date prices for the ticker, a 30 second check on its long-term stock chart will reveal my statement was correct. Slightly more than 15 years of stagnation in fact.

Inflation adjusted, it went down considerably over that time. That's not accounting for their share buybacks and dividends, which if you're lucky might have off-set 15 years of inflation.

Your attempt to claim I was wrong, consists of stating they generated a 10% return over seven years. Even if I were wrong about what I said (fortunately stock quotes are easy to check), that's comical. Go ahead and post what the annual return for those seven years was, under your 10% premise. Then find me an investor that wouldn't consider that stagnation. And that's the idealized scenario, the actual scenario is that the stock proceeded to consistently generate mediocre returns (or worse) between the post dotcom bubble era all the way into 2013.

The point of noting Microsoft's 15 plus years of stagnation in the market, is that their future returns were pulled forward. That's exactly what happened and investors suffered accordingly.

I don't think that you are taking in to account the 2 for 1 stock split that Microsoft had February 14, 2003.

If you factor in dividends and stock splits, it’s just about doubled since its dot-com high.

But, yes it has generally under-performed compared to the S&P 500 until recently.

http://stockcharts.com/freecharts/perf.php?MSFT,SPY

Thanks for this , it was the perfect breath mint after the articles main course. Puts this strange growth in the market on a new viewpoint for me

Investors are willing to accept much lower long-term returns for safe haven assets.

If you're going to "just own the damn robots" at any price, you're essentially paying for this sort of insurance.

I agree investors will continue to own these companies in a very big way. They won't continue to maintain much less inflate the premium that presently exists.

Microsoft for example has barely grown its income in a decade. On what planet should they have a 28 pe ratio? The stock has tripled (!) in five years on the back of zero income growth. It's massive value destruction just waiting to happen. Shareholders will not just sit, hold and tolerate the inevitable value destruction that is looming, it doesn't work as insurance at all in such a context.

You forget that Microsoft's stock stagnated for 10 years before that. A 28 PE ratio is the new normal for tech companies. With Ballmer out of the picture, investors are speculating on a brighter future for MS. It's not here yet but they're making lots of smart moves.

> A 28 PE ratio is the new normal for tech companies.

It's not the new normal. That's what people say to justify extreme premiums during times in which investors have overly inflated valuations. This is the third bubbly tech era in the last 20 years. That new normal premise has been used frequently in each.

I understand why Microsoft has inflated. It doesn't jive with actual results in the post Ballmer era. There isn't even a hint of the kind of growth that could justify such an elevated PE ratio (elevated for a company with no growth for years). Their fast growth areas are struggling to off-set what they're losing in eroding, old business franchises. Net result, they're standing still.

the problem with this argument is if you wait, you may leave money on the table in the form of:

missed dividends

the possibility that Microsoft grows its profits more

the possibility the stock keeps rising, and then even if it falls, it's still higher than the price you sold

The last reason is why timing the market is so hard. Had you sold the S&P 500 in early 1996 because it was 'too expensive', you would have never been able to buy back at a lower price, ever, even after the crash of 2000-2002 and 2008-2009, and you would have missed all the dividends.

Microsoft has to defer reporting revenue on sales of Windows 10. From their recent investor letter:

"We delivered $90.0 billion in revenue and $22.3 billion in operating income this past fiscal year. Adjusting for Windows 10 revenue deferrals and restructuring expenses, revenue was $96.7 billion with $29.3 billion in operating income."

That is 31% more revenue and 34% more operating income compared to 2012 (the 5 year time period you're citing). Stock backs will also move the price -- there's almost a billion fewer shares outstanding now than there were 5 years ago.

Of course, investors buy companies for future performance and not for past performance. I would suggest that investors like MSFT's current strategy and management considerably more than their past, and as the management continues to increase profits, investors gain more confidence.

but Facebook, Google, Amazon, and Microsoft are software, not hardware, so you're not owning the robots.

The robots are not literally robots in this story. Trading algorithms are robots. Uber's ability to connect riders and drivers is a robot.

That said, Amazon and google are in the robot hardware business literally, too.

Amazon is, but their customer is themselves. They use 50,000 robots today and that will grow fast.

Google doesn't sell robots. I don't know if they use them, apart from a few for research.

Their web spider is a robot. We are far past the time when humans could catalog that much change.

A self driving car is a robot, they will be selling that in a near future if Google themselves are to be believed.

Oops yes of course. I stupidly forgot about them. They spun them out from the Google brand and also my brain.

In this sort of context I feel like "robots" is a euphemism for "automation". Software has the lowest marginal cost out of all forms of automation.

Consider robo-advisors [0], automated financial advisors written in software.

[0] https://en.wikipedia.org/wiki/Robo-advisor

fwiw Amazon owns and invests in warehouse automation robots.

Robots isn't the right word. Automation is the right word.

To truly own the 'robot' you have to own all of its components; the hardware and the software.

Netflix has a ~200 PE ratio, there is no means for it to ever justify its existing valuation (400 million global subscribers? no chance), much less a far higher one. Their present business model has never proven the ability to produce good margins, content has perpetually sapped their earnings potential and is likely to continue to do so.

Facebook and Google will stagnate and grow into their valuations. Google particularly is trading far beyond where it should versus its now modest growth rate. ~37 times earnings, $700 billion market cap, for 10%-15% annual growth over the next five years? No thanks. In the not very distant future, Google will pull a Microsoft and begin paying out a dividend, after this latest stock market bubble ends and their stock returns drift to mediocrity.

People said that three, five, ten years ago. What is happening is that the market for mobile and desktop ads and e-commerce is growing, combined with increased market share for these three companies, creating a double tailwind. I'm certain Google, Amazon and Facebook will not suffer the fates of Exxon, GE, PetroChina, Royal Dutch Shell, Citigroup, AT&T, Gazprom, BP, Toyota, Bank of America, China Mobile, HSBC, ICBC, and Walmart. Part of the reason Amazon, Google, and Facebook will be permanently successful and are so resilient is because they have market dominance, impassable moats, ubiquity, and are mostly immune to global macro conditions, whereas commodity and banking companies are much more vulnerable to macro conditions. It's much easier to create a steel, drilling, or mining company (look at all the overnight fracking companies that went bust in 2015-2016) than it is to, say, get 1/6 of the world population on your social network (Facebook), every website and phone displaying your ads (Google), or every consumer buying from your store (Amazon) (and also the cloud hosting services). http://greyenlightenment.com/will-the-silicon-valley-tech-fo...

But also, some of those companies you listed pay huge dividends, so when you factor those into the returns, it's not stagnant.

> will be permanently successful

Surely you don't mean actually permanent. So what time scale do you think they will last?

One reasonable perspective is they will be successful until there is a market correction so large it can't be hedged against. World War Three, global warming societal collapse, popular revolution, or massive antitrust activity.

As they say, "in the long run we are all dead."

GE has been in business for 125 years and is still going strong. Not unreasonable to expect the same for at least some tech companies.

“Stock prices have reached what looks like a permanently high plateau” - Yale economist Irving Fisher, 1929

I don't think there's such a thing as impassable moat other than a monopoly. And monopolies eventually get busted by governments.

So uh how does shorting the top 10 companies and buying the rest of the market perform over the last couple decades?

Oddly enough, you can observe the same phenomenon for fighter pilots! After an amazing run, pilots tend to give a mediocre performance.

Is it 'future value compression,' or just reversion to the mean?

Or they get burnt out and die as happened to a lot of ww2 German aces

"Is Amazon going to grow into a $2 trillion market cap over the next ten years? No, there is zero possibility of that happening."

I would suggest that that's a bold statement.