The Biggest Winners May Not Be the Stocks You Expect
by Charles Rotblut | December 05, 2019
For this month’s First Cut column in the AAII Journal, we identified this decade’s biggest S&P 500 index winners. If I were to poll a random group of investors—individual or institutional—I would guess most could not correctly name more than three of the 10 stocks appearing on the list. (The full list is also linked to below.)
We ran the analysis because the end of the current decade is approaching, and we thought it would be interesting to see who the big winners are. There’s more to the list than just trivia, however. There are also lessons to be learned.
One of those lessons is to expand the universe of stocks you look at. Often when I speak publicly, I ask the audience how many people would invest in a stock they’ve never heard of. Usually, only a relatively small number of hands go up. It’s not surprising; there’s comfort in familiarity. Behavioral scientists refer to it as the familiarity bias.
Yet, only sticking to investments you are familiar with can be costly. Of this decade’s 10 biggest gainers, just one was a member of the S&P 500 on December 31, 2009: Amazon.com Inc. (AMZN). Four of the 10 started this decade with market capitalizations of less than $1 billion. MarketAxess Holdings Inc. (MKTX), for instance, was worth just $478 million back then. Today, it has a market cap of approximately $15 billion.
Another lesson is the difficulty in predicting which stocks will be big winners in the future. Think about two of the more obvious names making this month’s First Cut, Amazon and Netflix Inc. (NFLX). Both still had nascent streaming services a decade ago and, back then, neither was expected to offer blockbuster original programming such as “The Marvelous Mrs. Maisel” (season three starts tomorrow!) or “Orange Is the New Black.” Certainly, two-day shipping wasn’t demanded as much and fewer people were consuming content on their mobile devices at the beginning of the decade. The first Apple iPad tablet and the first Samsung Galaxy smartphone didn’t make their debut until April 2010 and June 2010, respectively.
Now consider a less obvious big winner, Ulta Beauty Inc. (ULTA). One would have had to make the assumption 10 years ago that the retailer would continue to hold off both online competitors and the many brick-and-mortar competitors it competes against. And that’s not to mention that selling cosmetics was not perceived as a growth segment industry the way technology companies were.
The analysis also demonstrated the difficulty of staying on top. Approximately 40% of current S&P 500 members weren’t in the index 10 years ago. While buying a mutual fund or exchange-traded fund index is viewed as being a low-turnover investment, over time the S&P 500 does change. Some companies included in the index get acquired, some get replaced by others with better stock price returns (and thereby larger market capitalizations) and many others stumble (either due to changing industry conditions, management mistakes or a combination of the two). So, if you’re just focusing on the biggest companies, you’re missing out on a very large number of stocks with much bigger upside potential.
Finally, long-term forecasts are unreliable. Sure, there will be some that turn out to be correct but mostly because of luck. Going back to Ulta, ask yourself how many pundits were telling you to load up the truck with the stock in December 2009. My guess is not many.
The same thing is occurring now. It’s difficult to predict what 2020’s best performers will be; it’s nearly impossible to say what the coming decade’s big winners will be. If I were to make a guess, most of them aren’t currently part of the S&P 500 and aren’t being talked about much either.
-
Investment Characteristics of Stock Market Winners – Those of you who want clues to future big gainers will find insights on characteristics to seek out in this 1989 AAII Journal article.
-
The Traits and Processes That Lead to Better Forecasts – Those who make better forecasts are both open-minded and able to distinguish between many degrees of uncertainty.
The percentage of individual investors describing their short-term outlook for the stock market as “neutral” is at a two-month high. The latest AAII Sentiment Survey also shows declines in both optimism and pessimism.
Bullish sentiment, expectations that stock prices will rise over the next six months, fell 1.9 percentage points to 31.7%. Bullish sentiment is below its historical average of 38.0% for 39th time this year.
Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, rose 3.1 percentage points to 39.2%. Neutral sentiment was last at this level on October 2, 2019. The increase keeps neutral sentiment above its historical average of 31.5% for the 28th time in 29 weeks.
Bearish sentiment, expectations that stock prices will fall over the next six months, pulled back by 1.1 percentage points to 29.1%. Pessimism is below its historical average of 30.5% for a seventh consecutive week.
Since topping 40% on consecutive weeks in early November, optimism has fallen by a cumulative nine percentage points. Pessimism, conversely, has stayed in a very tight range over the past three weeks and registered between 28.3% and 30.3% during five out of the last seven weeks.
Neutral sentiment is near the upper end of its typical range. Readings of 40.0% or higher are unusually high.
In the spirit of the holidays, our special question asked AAII members what their favorite thing is to eat on Thanksgiving. Unsurprisingly, leading the poll on the best Thanksgiving dish was turkey, with 35% of the respondents naming it as their favorite. Following close behind however was toppings, with 27% of respondents naming stuffing, cranberry sauce or gravy as their favorite part of the meal. Other respondents from this survey state that their favorite thing to eat is side dishes (17%) and desserts (15%). In the dessert category, pie (specifically pumpkin) is named most frequently. Finally, 5% of respondents fall into the “other” category; honorable mentions include: ham, duck and oysters.
Here is a sampling of the responses:
- “Candied yams, even though my blood sugar doesn’t like them.”
- “Beer.”
- “Dressing and lots of gravy, with a side mountain of buttered mashed potatoes, also flooded in gravy!”
- “Turkey … duh!”
- “Pie … lots of pie.”
Bullish: 31.7%, down 1.9 points
Neutral: 39.2%, up 3.1 points
Bearish: 29.1%, down 1.1 points
Bullish: 38.5%
Neutral: 31.0%
Bearish: 30.5%
AAII Asset Allocation Survey
Individual investors’ exposure to equity investments reached a seven-month high in November according to the latest AAII Asset Allocation Survey. Fixed-income exposure also rose, while cash allocations pulled back.
Stock and stock fund allocations rose 2.3 percentage points to 67.0%. Equity allocations were last higher in April 2019 (67.8%). The rise keeps stock and stock fund allocations above their historical average of 61.0% for the 80th consecutive month.
Bond and bond fund allocations rebounded by 0.4 percentage points to 18.7%. Fixed-income allocations are above their historical average of 16.0% for the ninth consecutive month and the 10th time in 11 months.
Cash allocations fell 2.7% percentage points to 14.3%. This is the smallest exposure to cash since January 2018 (13.3%). The drop also keeps cash allocations below their historical average of 23.0% for the 96th consecutive month.
New record highs for the major stock indexes helped to boost the value of individual investors’ equity holdings. At the same time, optimism about the short-term direction of stock prices was above its historical average on consecutive weeks in our weekly AAII Sentiment Survey during November for the first time since May 2019.
November AAII Asset Allocation Survey results:
- Stocks and stock funds: 67.0%, up 2.3 percentage points
- Bonds and bond funds: 18.7%, up 0.4 percentage points
- Cash: 14.3%, down 2.7 percentage points
November AAII Asset Allocation Survey details:
- Stocks: 27.9%, down 0.2 percentage points
- Stock funds: 39.1%, up 2.5 percentage points
- Bonds: 3.8%, down 0.3 percentage points
- Bond funds: 15.0%, up 0.7 percentage points
Historical Averages:
- Stocks/Stock Funds: 61.0%
- Bonds/Bond Funds: 16.0%
- Cash: 23.0%
The numbers are rounded and may not add up to 100%.
The AAII Asset Allocation Survey has been conducted monthly since November 1987 and asks AAII members what percentage of their portfolios are allocated to stocks, stock funds, bonds, bond funds and cash. The survey and its results are available online at: www.aaii.com/investor-surveys.
Want to weigh in? Take the survey yourself and see results online at www.aaii.com/assetallocationsurvey.
- Stocks and Stock Funds: 67.0%, up 2.2 percentage points
- Bonds and Bond Funds: 18.7%, up 0.5 percentage points
- Cash: 14.3%, down 2.7 percentage points
- Stocks: 27.9%, down 0.3 percentage points
- Stocks Funds: 39.1%, up 2.5 percentage points
- Bonds: 3.8%, down 0.3 percentage points
- Bond Funds: 15.0%, up 0.7 percentage points
- Stocks/Stock Funds: 61.5%
- Bonds/Bond Funds: 16.0%
- Cash: 22.5%
Take the Asset Allocation Survey.
November 28, 2019 Reasons for Individual Investors to Be Grateful
November 21, 2019 What the Proposed Change in RMDs Means for Investors
November 14, 2019 Big Losers Can Turn Into Short-Term Winners
November 7, 2019 Considerations for Roth IRA Contributions and Conversions
Discussion
No comments have been added yet. Add your thoughts to the discussion!
You need to log in as a registered AAII user before commenting.
Create an account