The Sour Seventies

The Sour Seventies

The Nifty Fifty

Like generals fighting the last war, War Street’ pros were planning not to repeat the mistakes of the 1960s in the 1970s. No more would they buy small electronics companies or exciting concept stocks. There was a return to reason and with it a return to “sound principles” that translated to investing in blue-chip companies with proven growth records. There were companies, so the thinking went, that would never come crashing down like the speculative favorites of the 1960s. Nothing could be more prudent than to buy their shares and then relax on the golf course while the long-term rewards materialized.

There were only four dozen or so of these premier growth stocks that so fascinated the institutional investors. The names were very familiar – IBM, Xeroxs, Avon Products, Kodak, McDonald’s Polaroid, and Disney, to list a few. They were called the “Nifty Fifty.” They were “big-capitaization” stocks, which meant that an institution could buy a good-sized position without disturbing the market. And since most pros realized that picking the esact correct time to buy is difficult if not impossible, these stocks seemed to make a great deal of senses. So what if you paid a price that was temporarily too high? Since these stocks were proven growers, sooner or later the price you paid would be justified. In addition, these were stocks which – like the family heirlooms – you would never sell. Hence they were also called “one-decision” stocks. You made a decision to buy them, once, and your portfolio-management problems were over.

The Sour Seventies. Photo by Elena

These stocks provided security blankets for institutional investors in another way too. They were so respectable. Your colleagues could never question your prudence in investing in IBM. True, you could lose money if IBM went down, but that was not considered a sign of imprudence (as it would be to lose money in a Performance Systems or a National Student Marketing). Like greyhounds in chase of the mechanical rabbit, bit pension funds, insurance companies, and bank trust funds loaded up on the Nifty fifty one-decision growth stocks. Hard as it is to believe, the institutions had actually started to speculate in blue chips. This is a case of classic insanity. The heights to which the stocks rose were unbelievable. In the table below listed are the price-earnings multiples achieved by a handful of these stocks in 1972. For comparison, the price earnings multiples at the start of the 1980s are listed too. Institutional managers blithely ignored the fact that no sizeble company could ever grow fast enough to justify an earnings multiple of 80 or 90. They once again proved the maxim that stupidity well packaged can sound like wisdom.

Security – Piece-Earnings Multiple 1972 – Price-Earnings Multiple 1980.

• Sony – 92; 17
• Polaroid – 90; 16
• McDonald’s – 83; 9
• Intl. Flavors – 81; 12
• Walt Disney – 76; 11
• Hewlett-Packard – 65; 18.

Perhaps one might argue that the craze was simply a manifestation of the return of confidence in late 1972. Richard Nixon had been reelected by a landslide, peace was “at hand” in Vietnam, price controls were due to come off, inflation was apparently “under control”, and no one knew what OPEC was. But in fact the market in general collapsed, the Nifty Fifty continued to command record earnings multiples and, on a relative basis, the overpricing greatly increased. There appeared to be a “two-tier” market. Forbes magazine commented as follows:

“(The Nifty Fifty appeared to rise up) from the ocean; it was as though all of the US but Nebraska had sunk into the sea. The two tier market really consisted of one tier and a lot of rubble down below.

What held the Nifty Fifty up? The same thing that help up tulip-bulb prices in long-ago Holland – popular delusions and the madness of crowds. The delusion was that these companies were so good that it didn’t matter what you paid for them; their inexorable growth would bail you out.

The end was inevitable. The Nifty Fifty craze ended like all other speculative manias. The Nifty Fifty were – in the words of Forbes columnist Martin Sosnoff – taken out and shot one by one. The oil embargo and the difficulty of obtaining gasoline hit Disney and its large stake in Disneyland and Disneyworld. Production problems with new cameras hit Polaroid. The stocks sank like stones into the ocean. A critical cover story in widely respected Forbes magazine sent Avon Products down almost 50 percent in six months. The real problem was never the particular needle that pricked each individual bubble. The problem was simply that the stocks were ridiculously overpriced. Sooner or later the same money managers who had worshiped the Nifty Fifty decided to make a second decision and sell. In the debacle that followed, the premier growth stocks fell completely from favor.

Amaze yourselves! Photo by Elena