A client sent me very interesting charts (below) that highlights the impact that Big Tech has on the stock market. The first one shows the S&P500 versus a global index ex US. You can see that the S&P 500 has significantly outperformed. The chart on the right shows the combined returns of f Facebook, Amazon, Alphabet (Google), Apple, Netflix and Microsoft on their own compared to the other 494 companies of the S&P 500 and the MSCI ex US. We can see the influence that tech companies are having on the stock market. We also saw this week that the Nasdaq 100 ETF which tracks the top 100 tech companies is at an all time high. So should we just ditch everything else and invest in tech?
I wrote a few weeks ago, that the biggest 5 companies of Microsoft, Apple, Amazon, Facebook and Alphabet make up 20% of the S&P 500 index and 12.8% of the much broader MSCI World Index which is made up of 1,600 companies. Of the narrower Nasdaq 100 index, they make up 44.84%. With innovation in technology all the time, these companies are having a bigger influence on our lives every day.
When we invest, we have to balance the level of risk that we are willing to take for the potential return that we might get. Do we always want to get the highest level of return available? Or do we want to offset some of that risk for a lower return. Let’s remind ourselves of what investment risk is:
It is impossible to improve your investment return without taking more risk. In other words, the potential for financial loss you expose yourself to in taking a risk is also the reason you earn a return. There is good risk and bad risk and higher exposure to the right risk factors leads to higher expected returns, but is no guarantee of them. Risk is the premium investors pay for the expectation of a greater return.
Even with companies the size of Apple and Microsoft, there is investment risk. And if you just invest in 5 of them, you have a concentration of assets where you get big rewards when things go well but bigger losses if things don’t work out.
Senator Elizabeth Warren in the US has threatened to break up Big Tech but it is not that simple. US antitrust law is about unfair prices on consumers as a a result of lack of competition. But these tech companies actually make things cheaper for consumers or their products may be free. What they do is squeeze the life out of the opposition.
Look at Facebook, Instagram and WhatsApp. All free apps. But they are taking advertising money from other platforms of advertising. Amazon has the financial might to sell products below cost price to force a competitor out of the market.
Where the break up of Big Tech may be is in the use of data and the selling of products. Did you know that the popular game Pokemon Go is owned by Google? They can use this game to sell advertising so you go into stores to collect a pokemon. Amazon uses your data to put their own products at the top of the pages and push their competitors products to page 10 where you are never going to look. Google will push their own products in search results over other products.
What Senator Warren has proposed is that is you collect the data, you can’t sell the products too. These companies are now extremely powerful and spend millions on lobbying and campaign contributions to keep the politicians onside, so it is unlikely that politicians will be the source of a breakup, if it happens.
Even still, when you invest, you apply investment principles. Diversification is the principle of spreading your investment risk around. The investment portfolios that we recommend to clients hold the shares and bonds of many companies and governments in many countries around the world. This means the negative and positive influence of each individual investment is reduced, producing, on aggregate, less risk in our portfolios.
There is no predictable pattern of which industry or region will be top or bottom in any given year, we just don’t know. Oil and Energy used to be the most powerful sector in the world, look at it now. So while tech may power on for the next few years, will it happen forever? And how much risk are you willing to take with your money that it will?
It is always important to stay disciplined when investing. Those massive returns that tech have earned are in the past and we don’t know if they will be repeated. Stay with the plan.
If you have any questions, drop me an email at firstname.lastname@example.org