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Research Affiliates Chairman Robert Arnott on why companies that become “top dogs” in their sector often have difficulty maintaining their success...
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-- indices.
Apple spend a headline almost every single day over the past six months but lately because its share prices dropping dropping while we.
We've heard of too big to fail but are some companies just too big to succeed.
My next guest says once a company gets to the top.
There's nowhere to go but down and what must that mean for all of you apple watchers were just dying to get in as the price falls.
Joining me now is chairman of research affiliates an investment giant Pimco -- only outside all asset manager.
Robert -- it's great to have you Roberts so glad that you're here to discuss the second I can hear people screaming right now because it happens.
Near the top of every -- what do you mean apple apple has to go higher it's wonderful it was the same with real estates and the dot -- -- what is your premise here that.
The the bigger company comes and what it hits the top of that market cap it becomes unattractive.
Well firstly a lot of credit goes to my co author on the study -- -- -- she did all the heavy lifting on this.
But what we did -- to go back historically and asked the -- very simple question when a company gets to be the largest.
In its sector.
The largest in its country are the largest in the world in market capitalization.
How does it then fair and what we find is something that we've always known and that is that a great company is not always a great investment.
What we find is that no top dog has ever stayed top dog.
Ever.
And if you have a top dog.
It winds up being targeted by regulators targeted by pundits targeted by competitors it can't.
-- but I.
Trust -- we have on the street is really important here and what it shows.
Is your study and that lets just say for example.
A couple of years after let's say three years after.
A company like apple hits the top market cap.
In the names relative to its sector falls about four point 5% ten years later it's down three point 7%.
When you compare it to the national stocks overall not just the sector.
The -- bigger down six point 4% of the three years after it hits the top market cap five point 4% after ten years.
Then the global picture looks really ugly down 11% but let me jump in and say.
I could hear people say what about ExxonMobil for example for many years if you look at the chart since 1975.
Yes there are gyrations and spasms but.
It's a pretty decent moved to the upside of over 75 years and that was a company that remain there for quite some time.
That's exactly right and you know ExxonMobil is kind of the exception that proves the rule.
It's the only.
Sector top dog in the world that has stayed sector top dog for fifty years -- half.
Crack -- -- that doesn't mean that it's out performed -- sector just means that it's kept pace with that sector.
Despite being -- -- So you're saying what apple is not a gonna be the one that people should be looking to buy right now so what is how do you identify the next and and what should people be looking at what is that name.
I think.
People need to if recognize that great companies are not necessarily good stocks not necessarily good investments and you don't get rewarded for chasing popularity.
For choosing safe havens in growth stocks you get rewarded for buying discomfort.
Okay what's -- huge company that is out of favor unloved.
And yet still huge.
Bank of America.
It's roughly four times the size of apple and it trades at 15 the value of apple.
So you get.
Ten to twenty times as much in sales or profits or book value.
For every dollar you invest in Bank of America now that doesn't mean that it's a great company.
It just means that the share price already reflects the fact that it's a struggling company.
And reflects the fact that apple is a is a golden success story.
But it has to remain a golden success story for the coming -- -- Carter's time.
To justify the current price.
Are there so many issues -- patent that lawsuits and margin questions you are you are so welcome here to be here to show people.
You've got to look at certain trends over the years but -- -- we we identified ExxonMobil that is an important point to make a second here people -- Liz Liz walked back ExxonMobil.
Thank you Robert it's great to have you on the program thank you.
-- and are not the closing bell.
