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The “Nifty 50” were pretty nifty, after all. This group of 50 blue-chip U.S. stocks dominated the bull market of the early 1970s and traded for sky-high P/E ratios. Though they were thought to be “set ’em and forget ’em” stocks — “one decision” stocks, as some called them — the group lost a huge amount on average in the 1973-74 bear market.
As a result, the Nifty 50 are often mentioned in any cautionary tale about the dangers of buying popular growth stocks at rich valuations. Their average P/E at the December 1972 stock market peak was over 40, for example, more than double the S&P 500’s ratio. Recently, for example, Apollo Global Management’s Torsten Slok analogized today’s “Magnificent Seven” stocks to the Nifty Fifty, arguing that these seven are just as overvalued today as those 50 were in 1972.
The Magnificent Seven stocks are Meta Platforms
META,
; Apple
AAPL,
; Amazon.com
AMZN,
; Alphabet (Google)
GOOGL,
; Microsoft
MSFT,
; Nvidia
NVDA,
and Tesla
TSLA,
Collectively, these stocks’ current P/E is 53.0, on average, according to Slok.
This Nifty 50 narrative is flawed, however. According to Jeremy Siegel, a finance professor at the University of Pennsylvania’s Wharton School, an investor who bought the Nifty 50 at the market’s peak in December 1972 and held into the 1990s would have come very close to matching the return of the S&P 500
SPX.
It therefore is not true that these stocks were grossly overvalued, Siegel argues in his book “Stocks For The Long Run”: “Forty times earnings clearly was not too much to pay for a good growth stock,” he writes, “despite the conventional wisdom on Wall Street subsequent to the Nifty Fifty crash.”
Notably, the particular list of Nifty 50 stocks that Siegel analyzed (circulated at the time by Morgan Guaranty Trust, now part of JPMorgan Chase
JPM,
) did not include Wal-Mart
WMT,
though other brokerage firms’ lists did include that stock. This is a crucial detail, since Wal-Mart’s stock hugely outperformed the S&P 500 subsequent to the market’s December 1972 peak. One calculation, published in Forbes magazine in 1996, found that Wal-Mart from the 1972 peak until early 1996 had produced a 15,854% return. Needless to say, the average long-term return of the Nifty 50 increases significantly when Wal-Mart is included.
The long term is a long time
There’s no denying that the Nifty 50 stocks were big casualties in the 1973-74 bear market. Matching or beating the S&P 500 required investors to muster enough patience and discipline to hold for the long term. That shouldn’t have been asking too much, since the stocks were touted in 1972 as “buy ‘em and forget ‘em.” Still, few investors had the fortitude to hold the stocks through that bear market.
That’s one reason why most investors lag the market over the long term, according to the late Charlie Munger, who passed away earlier this week. Munger, Warren Buffett’s right-hand man at Berkshire Hathaway
BRK.A,
BRK.B,
once said: “If you’re not willing to react with equanimity to a market price decline of 50% two or three times a century, you’re not fit to be a common shareholder and you deserve the mediocre result you’re going to get.”
The bottom line? The Magnificent Seven stocks may not be terrible long-term bets, their above-average P/E ratios notwithstanding. If the analogy to the Nifty 50 holds, and you’re willing to hold them for the extremely long term, you should be able to match the return of the broad stock market, if not do even better.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com
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