The "Nifty Fifty" Idea in the 1970s

by Burton G. Malkiel

 from A Random Walk Down Wall Street

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.

These stocks provided security blankets for institutional investors in another way, too. There were so respectable. Your colleagues could never question your prudence in investing in IBM. True, you could lose money if IBM went down, but that was not considered a sign of imprudence (as it would be to lose money in a Performance Systems or a National Student Marketing). 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. Hard as it is to believe, the institutions had started to speculate in blue chips. The heights to which the stocks rose were unbelievable. In the table on page 75, I have listed the stocks in 1972 as well as their multiples at the start of the 1980s. 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.

Perhaps one might argue that the craze was simply a manifestation of the return of confidence in late 1972. Richard Nixon had been re-elected by a landslide, peace was "at hand" in Vietnam, price controls were due to come off, inflation was apparently "under control," and no one knew what OPEC was. 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 U.S. 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 Sosnott—taken out and shot one by one. The oil embargo and the difficulty of obtaining gasoline hit Disney and its large stake in Disneyland and Disney World. Production problems with new cameras hit Polaroid. The stocks sank like stones into the ocean. A critical cover story in widely respected Forbes magazine sent Avon Products down almost 50 percent in six months. The real problem was never the particular needle that pricked each individual balloon. The problem was simply that the stocks were overpriced. Sooner or later the same money managers 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. To be fair, however, I should point out that the problem was not with the companies themselves. Investors who bought those same stocks in 1980 made handsome returns (well above the market average) through the end of the century.

Security	Price-Earnings Multiple 1972	Price-Earnings Multiple 1980
Sony	92	17
Polaroid	90	16
McDonald's	83	9
Intl. Flavors	81	12
Walt Disney	76	11
Hewlett-Packard	65	18