By Tom Sedoric and Casey Snyder

Earlier this year, Howard Marks of Oaktree Capital cited the legacy of the “Nifty Fifty” in a memo to clients exploring the ongoing conflict in the financial industry between ‘value’ and ‘growth’ stocks. Marks is a noted value investor and an oft-quoted billionaire in financial circles. But, let’s be honest. Does anyone remember The Nifty Fifty?

In the late 1960s and early 1970s, the Nifty Fifty represented a group of the top stocks of their time with company names such as IBM, Xerox, Polaroid, JC Penny, International Telephone & Telegraph, Sears, Eastman Kodak, General Electric, McDonalds, Walt Disney. This collection of companies stood as cultural totems to American prosperity and innovation. The Nifty Fifty was a potential yellow brick road to unlimited growth and wealth. It is now worth noting just how many of those public companies have lost their golden luster today.

Marks states that the Nifty Fifty represented a mania of sorts as the stocks “were considered so good that ‘nothing bad could happen to them’ and ‘there was no price too high’ for their shares”. As University of Pennsylvania professor Jeremy Siegel put it in his landmark 1998 study of the Nifty Fifty, they were “one decision stocks: buy and never sell.”  We know, with the benefit of hindsight, that strategy did not work so well.

The history of the Nifty Fifty is worth knowing, It tells us how the adrenaline rush of jumping on the bandwagon is as old as Dutch tulip mania in the 17th Century. After the bear market of 1968-70, the Nifty Fifty stocks became a magnet for institutional and private investors because the companies stood relatively tall even during a bear market with earnings growth and dividend returns assured. 

Not surprisingly, the popularity of Nifty Fifty also led to remarkably large market capitalizations - as much as 50 to 80 times in their price-to-earnings ratios. (P/E) Those who jumped on the bandwagon paid premium prices for these stocks. (A similar bubble was repeated almost three decades later in the run up to the bubble and bust of 2000).

Of course, history intervened to turn a bull market that began in 1970 into an angry bear and the Nifty Fifty became not so nifty. To deal with stagflation and a balance of payments problem, in August of 1971 President Richard Nixon pulled the United States off the gold standard and enacted a 90-day freeze on wages and prices. It upended more than a quarter-century of stable international economics, yet it was but a tremor before the true economic earthquake to come: the first Arab Oil Embargo in the winter of 1973-74. 

After reaching Olympian heights in late 1972, most Nifty Fifty stocks took a major dive over the next two years and for some high-flying companies took a deeper plunge. Polaroid and Avon dropped 90 percent and 85 percent, respectively. 

In his study of those 50 stocks over the period of 1972 to 1996, Jeremy Siegel concluded that many had turned out to be value bets despite their premium prices and high market capitalizations. As Marks noted, “the truly durable growth stocks among the Nifty Fifty – about half of them – compiled reasonable returns even when measured from their pre-crash highs, suggesting that very high valuations can be justified in the long run for a rare breed of company.” (author emphasis). One might ask how many Facebooks, Apples, Amazon, Netflix, or Googles (FAANG) will exist after the surge in their share prices in recent years.

To a younger generation of investors, living in the age of investing algorithms, the recent 30,000 Dow and astronomical valuations for FAANG, will make the Nifty Fifty era may seem like a time when dinosaurs roamed the earth and the Dow struggled to break the 1,000 mark. Despite technological transformations of investing, we can’t help but note the new normal of high-flying stocks looks very much like the old normal. 

The more things change, the more they barely do.  We encourage investors to look forward and not in the rearview mirror.  A pandemic has merely accelerated innovation and change.

This material is provided for information purposes only and is not a complete description of the securities, markets, or developments referred to in this material. Any opinions are those of the author and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of the strategy selected. The Dow Jone Industrial Average (DJIA), commonly known as ‘The Dow’ is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation to buy, sell or hold a specific security.