Here's How To Do Warren Buffett's Favorite Critical Thinking Exercise

The Sage of Omaha has a ridiculously fit mind - anything he says becomes news.

While Buffett's brain is constantly working to crank through books, play bridge, and lobby Congress, the man is also deliberate about doing mental weightlifting.

Bill Gates - a close friend of the investor - recounted in a 1996 Fortune column an exercise Buffett liked to do in critical thinking.

It's part of how their friendship started.

"On that first day, [Buffett] introduced me to an intriguing analytic exercise that he does," Gates said. "He'll choose a year - say, 1970 - and examine the 10 highest market-capitalization companies from around then. Then he'll go forward to 1990 and look at how those companies fared. His enthusiasm for the exercise was contagious."

Pretty cool, right? With this exercise, you can practice spotting trends, analyze why some companies sustain success while others slip, and how technology advances and cultural norms shape business.

We did a version of this exercise, comparing the market leaders over a 20-year interval. We looked at 1990 and 2010, using information provided to us by Howard Silverblatt, a senior index analyst at S&P Dow Jones Indices.

Here are the 10 largest market-cap companies of 1990:

1. IBM ($64.53 billion)
2. Exxon ($64.49 billion)
3. GE ($50.34 billion)
4. Philip Morris ($47.89 billion)
5. Royal Dutch Petrol ($42.15 billion)
6. Bristol-Myers Squibb ($35.2 billion)
7. Merck & Co ($34.81 billion)
8. Wal-Mart Stores ($34.26 billion)
9. AT&T ($32.8 billion)
10. Coca-Cola ($31.05 billion)

And the 10 largest market-cap companies of 2010:

1. Exxon Mobil ($368.71 billion)
2. Apple Inc. ($295.89 billion)
3. Microsoft ($238.79 billion)
4. Berkshire Hathaway ($198.03 billion)
5. GE ($194.88 billion)
6. Wal-Mart Stores ($192.1 billion)
7. Google ($189.94 billion)
8. Chevron ($183.64 billion)
9. IBM ($182.32 billion)
10. Procter & Gamble ($180.07 billion)

Summoning our inner Buffett, let's look at the overall shifts. Four companies - IBM, Exxon, GE, and Wal-Mart - stayed on top, while six fell off. Over the same period, several new entrants - Apple, Google, and Microsoft - claimed top spots.

There are a few takeaways.

First, changes in culture can lay waste to a consumer goods empire. Tobacco maker Philip Morris was gigantic back in 1990 when smoking was a popular habit, but legislation has deeply cut into its business. California rolled out the first smoking ban in 1995, starting a state-by-state trend that's curbed Philip Morris' dominance. And having all those Marlboro Men die of smoking-related diseases didn't help much, either.

Second, major corporations can sustain themselves if they stay "agile," as management experts like to say. GE has been so innovative for so long that it's shaped a lot of modern life. Thomas Edison's company kept it up into the new century, coming out with medical breakthroughs like high-definition brain scans and cancer detection devices. And while IBM slipped from its No. 1 rank as the world's most valuable company in 1990, the computing behemoth successfully moved into China and other emerging markets, and hopped onto massive trends in tech like cloud computing, bringing in billions in revenue.

Third, monopolistic companies can stay dominant if their market stays stable. Wal-Mart has presided over American low-cost retail for decades now, and the company shows no signs of slipping. Like billionaire investor Peter Thiel says, the monopoly is the finest form of capitalism.

If you have more observations, tell us in the comments.