Bob,
I don't have more info about this particular study. I will try to get some more details from the author, if I can. But what I do know is a similar study done by Jeremy Siegel on the "Nifty Fifty" of the early 70s. (Ref. "Stocks for the Long Run", pp. 107 -- 1998 edition). Here is that list of stocks (along with their P/Es in Jan 1972) :
Amer.-Express----------- 37.7
American-Home-Products-- 36.7
American-Hospital-Supply 48.1
AMP--------------------- 42.9
Anheuser-Busch---------- 31.5
Avon-Products----------- 61.2
Baxter------------------ 71.4
Black-&-Decker---------- 47.8
Bristol-Myers----------- 24.9
Burroughs--------------- 46.0
Cheseborough-Ponds------ 39.1
Coca-Cola--------------- 46.4
Digital-Equipment------- 56.2
Disney-(Walt)----------- 71.2
Dow-Chemical------------ 24.1
Eastman-Kodak----------- 43.5
Emery-Air-Freight------- 55.3
First-Nat'l-City-------- 20.5
General-Electric-------- 23.4
Gillette---------------- 24.3
Halliburton------------- 35.5
Heublein---------------- 29.4
IBM--------------------- 35.5
Int'l-Fla-&-Frag.------- 69.1
ITT--------------------- 15.4
J.C.-Penney------------- 31.5
Johnson-&-Johnson------- 57.1
Jos.-Schlitz-Brewing---- 39.6
Kresge-(now-Kmart)------ 49.5
Lilly-(Eli)------------- 40.6
Louisiana-Land-&-Expl.-- 26.6
Lubrizol---------------- 32.6
McDonald's-------------- 71.0
Merck------------------- 43.0
MGIC-Investment--------- 68.5
Minnesota-Mining-&-Man.- 39.0
Pepsico----------------- 27.6
Pfizer------------------ 28.4
Philip-Morris----------- 24.0
Polaroid---------------- 94.8
Procter-&-Gamble-------- 29.8
Revlon------------------ 25.0
Schering-Plough--------- 48.1
Schlumberger------------ 45.6
Sears-Roebuck----------- 29.2
Simplicity-Patterns----- 50.0
Squibb-(now-BM-Squibb)-- 30.1
Texas-Instruments------- 39.5
Upjohn------------------ 38.8
Xerox------------------- 45.8
As you can probably see, almost none of these can be called "hot mo-mos". Almost all of them had demonstrated the ability to grow earnings and cash flow over extended periods of time. What most of them had going against them, however, is high valuations.
We come to this issue again and again -- high valuations are toxic to any stock, going forward. And btw, to address your first point, it doesn't matter whether we go through a bull or a bear market. The Nifty Fifty went through a terrible bear in 1973-74. Well, that didn't help them either! The real issue is valuations. If you go too high, you simply have too far to fall, unless you get out at or near the highs.
As to your second point, yes, the cost basis for those who got in on the ground floor would have been much lower, but even those investors would have been better off selling when everybody else thought the world of those stocks, paid the capital gains taxes, invest the proceeds in the overall market and still come out ahead in the longer run.
As they say in the real-estate market -- "location, location, location", so they should say in the stock-market -- "valuation, valuation, valuation". I am sure that they will be saying it sometime in the future; only not sure when they will be saying it! |
