Lessons From The “Nifty Fifty”

Recently, Bank of America discussed the “5-Lessons From The Nifty Fifty.” Of course, if you are unfamiliar with the importance of “The Nifty Fifty,” it is worth explaining.

The “Nifty Fifty” refers to the fifty most popular large-cap stocks in the 1960s and 70s. These “household” names traded at extreme valuations and included household names such as Xerox (XRX), IBM, Polaroid, and Coca-Cola (KO). Many of these Nifty-Fifty stocks had price-to-earnings (P/E) ratios as high as 100 times earnings. Despite high valuations, investors bought shares due to their proven growth records and dividend increases. Such occurred as inflation weighed on everything else.

Wall Street touted the “Nifty Fifty” stocks to investors as “one-decision” picks, just “buy and never sell.”

“The greater fool in growth stocks isn’t the one who buys them but the one who sells them.” – Carl Hathaway, SVP at Morgan Guaranty, March 1973

Those stocks propelled the bull market of the early 1970s. But, unsurprisingly, as investors repeatedly learn, overpaying for value eventually reverts to the mean. The 1973-74 bear market became known as the “Black Bear Market,” as the massive decline convinced investors “equities were dead.”

As Michael Hartnett of BofA notes, there are some critical macro parallels between 1965-1980 and today:

  • 1965-68: Government spending on the Vietnam war and Great Society policy platform combined with unionization and an accommodative Fed to stoke inflation. Asset winners were small caps and tech stocks.
  • 1969-73: Volatility and inflation surged with the end of Bretton Woods and the failure of wage/price controls. Stocks and bonds underperformed in real terms.
  • 1974-79: Oil price shocks, power shortages, food price shocks, wage-price spirals, and budgetary pressures led to stagflation.

We’re seeing evidence of all these phenomena today, albeit over a shorter period. Notably, the 60-70s were marked by repeating surges in inflation, recessions, and bear markets. For roughly 15 years, from 1965 to 1980, investors’ return after inflation was nearly a negative 10% annualized.