Top-Dog Investments & The Winner’s Curse

Top-Dog Investments & The Winner’s Curse

When you are shopping for a new car, you compare price and attempt to get the best value for your dollar. Same too for real estate purchases or about anything else you can think of. Well, except investments.

Investments that increase in price garner more attention and tend attract more incremental investment dollars … at least for a while. An astute investor will realize that with increasing prices absent a commensurate increase in future growth expectations, that company has now become more expensive not just on an absolute basis but also, and importantly, on a relative basis in comparing price to expected growth and earnings. In effect, investing in the top-dog company after it has become the top-dog is analogous to overpaying for the same car.

Evidence proves this theory. In a 2012 paper, The Winner’s Curse: Too Big to Succeed, the authors found that for investors, Top Dog status — the #1 company, by market capitalization, in each sector or market — is quite unattractive. They found a statistically significant relationship for top companies in each sector to underperform both the overall sector and the stock market as a whole over next 1 to 10 years. This phenomenon was found not just in the U.S. but in sectors and countries throughout the world.

Relatedly, since 1980, typically only 2 of the top 10 companies in the market remain among the largest companies 10 years later. Jeff Bezos realizes this, being quoted as saying, “Amazon will go bankrupt. If you look at large companies, their lifespans tend to be 30-plus years, not a hundred-plus years.”


Most recently, a handful of large stocks have garnered attention for outsized returns. Collectively referred to by the FANMAG acronym, Facebook, Amazon, Netflix, Microsoft, Apple, and Google (now trading as Alphabet) all substantially outperformed the US market in the eight calendar years that they have all been public companies (Facebook went public in May 2012). Most consider these companies technology companies even though their sector classifications may vary. Almost all would consider them top dogs.

I’ve written how these darlings have done so well that their past success is also the reason they are unlikely to be darlings going forward. They may still be great companies but as an investment, they are more likely to suffer the winner’s curse.

Growth expectations are higher today for these companies and market share will continue to be more difficult to come by. Prices for these companies are significantly higher today relative to their earnings and growth rates from a decade ago. These behemoths are also increasingly competing with one another and many are incurring increased regulatory scrutiny.


Investing is a tricky endeavor for us humans. Our brains prefer stories and mental short-cuts compared to rigorous data analysis and rational thought.

If history is any guide, the FANMAG acronym will eventually be replaced by another trendy name. Well, I suppose it already has, being it was first FAANG stocks until Microsoft joined the party.

And stock market historians will remember the Nifty Fifty in the 1960s and 70s, a set of 50 blue-chip stocks like Coca-Cola and General Electric. The early 2000s witnessed increasing adoption of the acronym BRIC, representing investment opportunities in the fast-growing emerging economies of Brazil, Russia, India, and China. More recently, the WATCH companies—Walmart, Amazon, Target, Costco, and Home Depot—have also gained traction in the market’s lexicon. Again, humans like stories and short cuts.

While documenting trends in finance is entertaining, there is little evidence that investors can spot these trends in advance in a way that would enable market-beating performance. Rather, the top dogs garner attention after they begin their ascent and are closer to becoming top dogs. Investors pile on and are eventually disappointed.

Concentrated bets on high-flying stocks or sectors exposes you to increasing risks and a wider range of possible outcomes. By contrast, a sound investment approach based on financial science emphasizes the importance of broadly diversified portfolios that provide exposure to a vast array of companies to help manage risks and increase the reliability of investment outcomes.

By concentrating on a few stocks or sectors, you may become fabulously wealthy. But you may also underperform quite substantially. If you are early in your working years, perhaps you’re comfortable taking a concentrated. If you’re at or near retirement, making that same bet could be quite ruinous. And who wants to be forced to unretire? Anyone?