The "Nifty Fifty" Idea in the 1970s
In the 1970s, Wall Street's pros vowed to return to "sound principles." Concepts were out and investing in blue-chip companies was in. These 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. Their names were familiar—IBM, Xerox, Avon Products, Kodak, McDonald's, Polaroid, and Disney—and they were called the "Nifty Fifty." They were "big capitalization" stocks, which meant that an institution could buy a good-sized position without disturbing the market. And because most pros realized that picking the exact correct time to buy is difficult if not impossible, these stocks seemed to make a great deal of sense. So what if you paid a price that was temporarily too high? These stocks were proven growers, and sooner or later the price you paid would be justified. In addition, these were stocks that-like the family heirlooms-you would never sell. Hence they also were called "one decision" stocks. You made a decision to buy them, once, and your portfolio-management problems were over.
Institutional managers blithely ignored the fact that no sizable 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. In fact, the market had already started to decline in early 1972 and, when it did, the Nifty Fifty mania became even more pathological. For as 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. 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." In the debacle that followed, the premier growth stocks fell completely from favor. To be fair, however, investors who bought those same stocks in 1980 made handsome returns (well above the market average) through the end of the century.
Peak and Post-Bubble Valuations of the Nifty-Fifty Stocks in the 1970’s
Company 1972 1980
Sony 92 17
Polaroid 90 16
McDonald’s 83 9
International Flavors 81 12
Walt Disney 76 11
Hewlett Packard 65 18
Source: A Random Walk Down Wall Street
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