About a year and a half ago I wrote and article investigating the performance of the largest public stock by market capitalization each year.
The original study was featured in the book “Mosaic: Perspectives on Investing” by Pabrai.
Pabrai did a backtest and reported a near 500 bps underperformance for the top mkt cap company vs the S&P 500. I extended the study a few years and found the results to be consistent, with the underperformance in CAGR of almost 7% from 1986-2006. This intuitively makes sense as the forces of capitalism work to compete with the top company (in addition to the difficulty in growing earnings at a massive scale).
How did this strategy perform in 2007?
Awful. Exxon’s stock (XOM) was up about 24% vs. 5.5% for the S&P 500. XOM would have been the largest company again in 2008, and both XOM and the S&P are down about equally in 2008.
Bespoke takes a look at the top companies in the world by market cap and 2008 stock performance.
PS One of the topics Pabrai covers in a subsequent book is cloning the best investment processes of great investors such as Buffett, Graham, and Munger. He argues that there is no need to reinvent the wheel – and simply apply the same selection model these investors have for decades. I go a step further and argue that an investor can perform equally well by simply following the holdings of these investors.
I have no idea how Pabrai’s funds are performing, but if he is just running a long only book, then it sure looks like he is in trouble (from SEC filings). I don’t see him on the implode-o-meter list…