Amazon has been on a tear. Its market cap is expected to reach US $1T. Apple recently made history by accomplishing the same. Headlines have been focusing on this massive growth. It’s almost as if massive, successful, and innovative companies are a new thing. When massive growth companies dominate the market and the headlines it is natural to wonder if it’s different this time.

It is not different this time. At least not yet. New technologies and ideas driving huge growth in the value of companies has been happening for as long as we have data available.

The oldest verifiable example is the Dutch East India company which was worth US$7.9T in 1637 if we adjust for inflation. We might look back on that now and say ah well it was a bubble. At that time, though, they were opening up global trade and exploring uncharted parts of the planet. That valuation did not last, and surely there were people who lost a lot buying at the peak.

The challenge with investing in growth stocks is that we never know when the tide will turn. It is improbable that FAANG will continue their current trajectory. That is not a prediction, it is a common-sense observation.

We have to remember that technology as we know it today with the cloud, web-based applications, and massive scalability is relatively new. Older technologies or even emergent ideas had similar impacts on the market in their time.

  • In 1900 well over 50% of the US stock market consisted of rail companies.
  • In 1900 Standard Oil was worth US $1T if we adjust for inflation.
  • 20 years ago, in July 1998, AT&T was the largest company in the US by market cap by a significant margin, followed by GE.
  • Adjusted for inflation, AT&T’s July 1998 market cap would be 504B, about the same as Facebook (pre-Facebook’s July crash).
  • In July 1998 AT&T was 3.4% of the total US market cap. In June 2018 Apple is 2.6% of total US market cap. That trend has remained relatively stable over time.
  • The 5 largest companies in 1998 made up 11.6% of the US market. The 5 largest companies in 2018 make up 11.5% of the US market.

I think it’s fair to say that the well-known growth companies today are not anomalous. Similar to past storied growth companies they are leading the market by changing the world which is driving up both their earnings, and their prices relative to their earnings.

None of this makes it any easier to invest in growth companies. The 5 largest companies in the US in 1998 currently rank 18, 44, 5, 27, and 10 in 2018. Growth companies are easy to spot after the fact, and next to impossible to invest in before their massive growth. Even harder than that might be hanging on through their massive growth, which tends to be highly volatile, and then knowing when to get out. Further complicating things is the fact that, on average, growth companies have produced lower returns over the long-term than value companies.

The world is changing. There are innovative companies creating value by changing the world. That innovation is what drives capitalism. This is nothing new for the stock market.