"Like generals fighting the last war, Wall Street's pros were planning not to repeat the mistakes of the 1960s and 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. These were companies that, so the thinking went, 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...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...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.
These stocks provided security blankets for institutional investors in another way too. They were so respectable... Like greyhounds in chase of the mechanical rabbit, big pension funds, insurance companies, and bank trust funds loaded up on the Nifty Fifty one-decision growth stocks... The heights to which the stocks rose was unbelievable... Institutional managers blithely ignored the fact that 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.
Security/PE 1972/PE 1980
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Sony /92/ 17
Polaroid /90/ 16
McDonalds /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 to confidence in late 1972...But 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. 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 held 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 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 Forbes sent Avon Products down almost 50% 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 manager who had worshipped the Nifty Fifty decided to make a second decision and sell. In the debacle that followed, the premier growth stocks fell completely from favor."
quoted from Burton G. Malkiel, "A Random Walk Down Wall Street", Fourth edition, pp. 72-74
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