The Nifty Fifty: Growth Stocks and the Health of your Wealth

Published 12.21.2017

The early 1970’s was a fun and profitable period in American financial history.  Diana Ross and the Jackson 5 were playing on the radio, a house cost around $25,000, and the Nifty Fifty dominated investment talk even with inflation running at about 5%. 

The Nifty Fifty were the “no brainer” growth stocks of the era.  The buy and forget portfolio that you want to buy but never sell.  Some people may have argued that paying 30 times earnings for this group was expensive – but there were others who justified the price.  Names like McDonalds, Xerox, Coke, Philip Morris, Revlon, Avon, Sears, Polaroid, and IBM were part of the list.  This investment strategy worked until the bull market ended.  The 1973/1974 Bear Market was brutal with losses in various stocks exceeding 40%.  The Nifty Fifty could do no wrong until, of course, the Bear Market decided otherwise as these stocks in many cases lost more than popular market averages. What this teaches me are several important lessons, including;

  1. Buy and hold is not my way of investing.
  2. Manias – periods of heightened interest and investment in a security, structure, or industry – that are not supported by defensible value metrics should be looked at skeptically.
  3. I believe there will always be cycles. Periods of extreme optimism are likely to be accompanied by high valuations.  This is when people should be planning for the contraction. 

Today Bitcoin seems to be a very popular topic.  Forget trying to explain crypto currency. Rather, tell me why Bitcoin is worth the over $250 Billion value it currently trades at?  Before you accuse me of being “old school” and telling me this is the future, go back to my lessons learned, “why is it valued at this level, what supports the value, how fast is users growing to justify this value?”

Harder would be to be critical of all the talk of FAANG stocks; Facebook, Apple, Amazon, Netflix and Google.  Hard to imagine a world without these companies.  It would have also been hard to imagine worlds without Prodigy, and AOL.  Commodore Computers and Polaroid cameras.  Even taking a more optimistic view assume these companies are all viable and will be in existence thirty years from now (as long as a time as this seems).  The question is if the value they currently trade at is justified.

Cheers to a terrific 2017.  Let’s ring in 2018 with fanfare and watch all the twists and turns that are sure to play out. Just remember to stick to your discipline, find opportunities where others fail to look, and enjoy the journey.  

Sources:
https://www.aaii.com/journal/article/valuing-growth-stocks-revisiting-the-nifty-fifty

Disclosures:

Past performance is not an indication of future performance.  The information provided in this newsletter is for informational purposes only and should not be considered investment advice or a recommendation to buy or sell any types of securities.  There is a risk of loss from investments in securities, including the risk of loss of principal. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. Asset allocation and portfolio diversification cannot assure or guarantee better performance and cannot eliminate the risk of investment losses. 

The information contained herein reflects Lido’s views as of the date of this newsletter. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessary come to pass. Lido has obtained the information provided herein from various third party sources believed to be reliable but such information is not guaranteed. Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. Lido is not responsible for the consequences of any decisions or actions taken as a result of information provided in this newsletter and does not warrant or guarantee the accuracy or completeness of this information.