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Today, we'll discuss lessons from the Nifty Fifty in just 5 minutes to read.

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Rise and Fall of the Nifty Fifty

Partying like it’s 1972

In the '60s and early '70s, Wall Street wasn't just dancing; it was grooving to roughly 50 stocks. Enter the Nifty Fifty, a group of blue-chip darlings. Investors pounced on them as valuations kept surging. 

Let's take a trip down memory lane and explore the rise, fall, and lasting legacy of the Nifty Fifty, the stocks known as solid “buy and hold” growth companies and Blue-chip stocks. 

The stocks included household names like Coca-Cola, Kodak, IBM, and McDonald's. They were the epitome of stability and growth, often trading at price-to-earnings ratios far above the market average. But the story of the Nifty Fifty doesn’t end all that well.

As the market entered the bear phase of the mid-1970s, these once-invincible stocks faced dramatic declines. Polaroid and Avon plummeted over 90%. (Others managed to recover and continue to perform well, but the period proved that a great company is not necessarily a great stock.)

The period was also formative for many of today’s top investors. Warren Buffett and Charlie Munger famously avoided investing in technology stocks for decades after witnessing the overvaluation of companies like IBM during the Nifty Fifty era. 

It’s worth delving into the Nifty Fifty roughly 50 years later, for it’s a tale of exuberance, caution, and timeless investing lessons.

One decision investments

It’s around 1970. The U.S. economy is growing strong, and the Nifty Fifty develops a reputation for robust balance sheets, consistent earnings growth, and attractive growth rates. Many offer attractive dividends. During a time of rising inflation concerns, the stocks are widely viewed as a hedge. They are also large, established companies known as leaders in their respective industries. 

Investors considered them "one-decision" investments, meaning they could be bought and held indefinitely, simplifying investment decisions. Many analysts believed the stocks could only go up. Concerns about national debt and restrictions on gold ownership made the Nifty Fifty stocks one of the best options for combining security and returns.

At their peak in 1972, the Nifty Fifty stocks commanded premium valuations: The average price-to-earnings (P/E) ratio (not a perfect measure by any means, but a barometer) for these stocks was about 42, compared to 19 for the S&P 500 index. Some companies in the group had P/E ratios exceeding 50. 

Downfall and lessons

Many Nifty Fifty stocks no longer exist. The Nifty Fifty's fall began in 1973-1974, when the oil crisis led to a recession and stock market crash, hitting many Nifty Fifty stocks hard. New industries and technologies emerged, and some older companies struggled to adapt. Many of the stocks had become overvalued, and when they failed to meet investors' high growth expectations, confidence waned.

A few lessons became clear:

Don't fight the Fed: Investors got this reminder in 2022. Conventional market wisdom suggests that aggressive interest rate hikes by the Federal Reserve can affect fear, greed, and valuations. 

Be cautious of overvaluation: Markets tend to overreact in both directions, and the Nifty Fifty’s rise and fall is no different. 

Market leadership changes: Few companies stay great for decades. Former market leaders can fall out of favor, and even quality companies can become obsolete quickly. 

Beware of "one-decision" and “safe-haven” stocks: It is dangerous to think that individual stocks can be bought and held indefinitely without any concern. 

Growth stocks can mature: Not all Nifty Fifty lessons have a cautious tilt. Some growth stocks may eventually transition into dividend-paying value stocks, an evolution some investors benefited from in the 1970s. 

Opportunities in bear markets: There can be big winners even during market downturns. 

As Howard Marks said, “One of the things I like to say is, ‘That experience is what you got when you didn’t get what you wanted.’ And so, I was very fortunate to learn a painful lesson early. You invest in America's best companies and lose almost all your money. 

“Investing is not a matter of what you buy; it’s what you pay. Investing is not a matter of buying good things, but buying things well. And you have to understand the difference between buying good things and buying things well. And I think that’s what we’ve been able to do.”

Other takeaways

Today’s equivalent of the Nifty Fifty is the Magnificent 7, the tech titans that have dominated market performance.

Drawing parallels to the Nifty Fifty era of the late 1960s and early 1970s, we see that market darlings can face challenges in maintaining their stellar performance. The Nifty Fifty stocks, once considered "one-decision" investments, eventually disappointed investors despite their strong fundamentals.

Similarly, the Magnificent 7’s relatively high valuations and market dominance have concerned some investors. The Magnificent 7 could keep rising for years. Yet, while it's tempting to ride the wave of top performers, history suggests that market leadership often rotates. 

Dive deeper

For more, read about other lessons about the Nifty Fifty and how they can help today’s investors.

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