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Strategies & Market Trends : Nifty Fifty Articles Archive -- Ignore unavailable to you. Want to Upgrade?

To: Jack Hartmann who wrote (4)	12/2/2000 6:25:02 PM
From: Jack Hartmann	Read Replies (1) \| Respond to of 13

The Nifty Fifty of the 1970s For those of us with memories of the debacle of the "Nifty Fifty" in the first half of the 1970s, the risk inherent in abnormally high price-earnings ratios is very vivid indeed. The Nifty Fifty was a collection of the most popular growth stocks of the late 1960s and early 1970s. These stocks were the favorites of institutional investors and often referred to as "one-decision" stocks, meaning that one purchased them to hold forever because it was believed that the only direction in which they could go was up. The Nifty Fifty were large capitalization stocks with, for the most part, very high price-earnings ratios. At the peak of their popularity in December of 1972, their average relative price-earnings ratio was 2.22. A list of the Nifty Fifty is provided in the table at the end of this paper. Also provided in the table is the depth of decline that each of the Nifty Fifty experienced between its high and its subsequent low during the 1970s. It will be noted that, while the market as a whole declined 48%, the Nifty Fifty declined an average of 62%. The difference between seeing 62% of one's wealth disappear, as opposed to seeing 48% disappear, may not seem all that great. It is useful to note, however, that, for any set of numbers, the component below the average must be as great as the component above the average. In other words, to arrive at an average decline of 48%, there must have been another group of stocks during the 1970s, which we shall call the "Not-So-Nifty" Fifty, that declined, on average, only 34% (the average of 62% and 34% is 48%). Clearly it would have been significantly better during the 1970s to have owned the fifty that were not so nifty. Let us carry this argument one step further. In examining the Nifty Fifty table, we determine that, while the decline of the 25 stocks with the lower P/Es averaged 57%, the decline of the 25 with the higher P/Es averaged 67%. To arrive at our average decline of 48% for the S&P 500, given that half the Nifty Fifty declined an average of 67%, there must have been a comparable component of our "Not-So-Nifty" Fifty that declined only 29%. Once again, losing 29% of one's wealth is considerably less painful than losing 67%. The implication would seem to be that, at least in this earlier period, relative price earnings ratios were a pretty good measure of the idiosyncratic risk - the risk over and above the risk inherent in the market as a whole - associated with stocks with inordinately high price-earnings ratios dows.com