Large cap stocks like Apple Inc. (NASDAQ:AAPL), Facebook Inc (NASDAQ:FB), and Alphabet Inc (NASDAQ:GOOGL) enjoy one of the weirdest periods in the history of the stock market. Historically, small-cap stocks outperformed large-cap stocks by an average of about five percentage points per year. In fact, “size effect” was the first major anomaly that was identified and incorporated asset pricing models.
Last two years technology stocks have been defying this conventional wisdom. Investors believed bigger is better and pushed the prices of large-cap technology companies like Apple, Facebook Inc (NASDAQ:FB) and Alphabet Inc (NASDAQ:GOOGL) to record highs. At one point Carl Icahn predicted that Apple Inc. (NASDAQ:AAPL), a hardware company, will reach a market valuation of $1.5 trillion. Today, Alphabet practically has the same valuation as Apple. Facebook and Alphabet, both advertising companies, have a combined valuation approaching $1 trillion. William Randolph Hearst must be turning in his grave.
Today, I am at one of the biggest hedge fund conferences in the world: Skybridge Alternatives (SALT) Conference. Hedge funds failed to outperform the market since 2008 and the alpha generated by the industry as a whole has been declining. Yet, hedge funds collectively manage 50% more money compared to 2008. Traditional investors like Warren Buffett, who used to invest in media and newspaper stocks don’t understand the tech industry. Warren Buffett also don’t understand the growth and sustainability of the hedge fund industry. Hedge funds and Apple, Alphabet Inc (NASDAQ:GOOGL), and Facebook have something in common: market capacity. Let me start with Apple and explain what I mean.
Last July I was invited to CNBC Asia as a guest to talk about my bearish stance on Apple Inc. (NASDAQ:AAPL). The stock was trading above $130 when they contacted me. Let me be clear. They didn’t contact me because I am this tech guru with a crystal ball who can foresee the future. They contacted me because there weren’t a lot of investors who were bearish on the stock. Apple was flying high and most market prognosticators were taking the “safe” route and predicting that Apple will keep growing for the foreseeable future.