In a memo to clients earlier this year, Howard Marks of Oaktree Capital cited the legacy of the “Nifty 50” in exploring the ongoing conflict in the financial industry between “value” and “growth” stocks.
Marks is a noted value investor and an oft-quoted billionaire in financial circles. But, let’s be honest. Does anyone remember the Nifty 50?
In the late 1960s and early 1970s, the Nifty 50 represented a group of the top stocks of their time, with company names such as IBM, Xerox, Polaroid, JCPenny, International Telephone & Telegraph, Sears, Eastman Kodak, General Electric, McDonald’s, Walt Disney. This collection of companies stood as cultural totems to American prosperity and innovation. The Nifty 50 was a potential yellow brick road to unlimited growth and wealth. It is now worth noting just how many of those public companies have lost their golden luster today.
Marks states that the Nifty 50 represented a mania of sorts as their stocks “were considered so good that ‘nothing bad could happen to them’ and ‘there was no price too high’ for their shares.”
As University of Pennsylvania professor Jeremy Siegel put it in his landmark 1998 study of the Nifty 50, they were “one-decision stocks: buy and never sell.” We now know, with the benefit of hindsight, that strategy did not work so well.
The history of the Nifty 50 tells us how the adrenaline rush of jumping on the bandwagon is as old as the Dutch tulip mania in the 17th century. After the bear market of 1968-70, the Nifty 50 stocks became a magnet for institutional and private investors because the companies stood relatively tall even during a bear market with earnings growth and dividend returns assured.
Not surprisingly, the popularity of the Nifty 50 also led to remarkably large market capitalizations — as much as 50 to 80 times in their price-to-earnings ratios. Those who jumped on the bandwagon paid premium prices for these stocks. (A similar bubble was repeated almost three decades later in the run-up to the dot-com bubble and bust of 2000).
Of course, history intervened to turn a bull market that began in 1970 into an angry bear, and the Nifty 50 became not so nifty. To deal with stagflation and a balance of payment problems, in August 1971 President Nixon pulled the U.S. off the gold standard and enacted a 90-day freeze on wages and prices. It upended more than a quarter-century of stable international economics, yet it was but a tremor before the true economic earthquake to come: the first Arab oil embargo in the winter of 1973-74.
After reaching Olympian heights in late 1972, most Nifty 50 stocks took a major dive over the next two years, and some high-flying companies took a deeper plunge. Polaroid and Avon dropped 90% and 85%, respectively.
In his study of those 50 stocks over the period of 1972 to 1996, Siegel concluded that many had turned out to be value bets despite their premium prices and high market capitalizations. As Marks noted, “the truly durable growth stocks among the Nifty 50 — about half of them — compiled reasonable returns even when measured from their pre-crash highs, suggesting that very high valuations can be justified in the long run for a rare breed of company.” One might ask how many Facebooks, Apples, Amazons, Netflixes or Googles (FAANG) will exist after the surge in their share prices in recent years.
To a younger generation of investors, living in the age of investing algorithms, the recent 30,000 Dow and astronomical valuations for FAANG, will make the Nifty 50 era may seem like a time when dinosaurs roamed the earth and the Dow struggled to break the 1,000 mark. Despite technological transformations of investing, we can’t help but note the new normal of high-flying stocks looks very much like the old normal.
The more things change, the more they barely do. We encourage investors to look forward and not in the rearview mirror. A pandemic has merely accelerated innovation and change.
Tom Sedoric is partner, executive managing director and wealth manager and D. Casey Snyder, CFP, is partner, senior vice president and wealth manager of The Sedoric Group of Steward Partners in Portsmouth. For more information, visit thesedoricgroup.com.