An article looking at the extended bull market in consumer stocks appeared in The Telegraph recently. While high quality consumer stocks are certainly in vogue right now, that was not the most interesting thing about the piece. No, that distinction fell to the Nifty Fifty, which the author cited as an example of what happens when investing in periods of high valuations.
Now, the original Nifty Fifty was a group of large-cap stocks in the 1960s and 1970s that were billed as perfect buy-and-holds. Combine that sentiment with a raging equity bull market, and you had the recipe for some really lofty valuations. We are taking around 60x annual earnings for certain household names like Johnson & Johnson. Anyway, the implication of the article was that investing in the euphoria of that bull market was a bad idea due to the poor returns that followed.
Now, it is true that an investment the Nifty Fifty performed really poorly in the early-1970s. We are talking serious drawdowns – around 50% in the case of the Dow Jones Industrial Average, and a bunch of the Nifty Fifty did even worse than that. That said, the article is also guilty of cherry picking to make its point. In fact, you could just as easily use the Nifty Fifty to show how solid blue chip stocks will ultimately yield great long-term returns.
The Nifty Fifty
Turn the clock back to August, 1972. Richard Nixon was finishing his first term as POTUS and ground combat troops were withdrawing from Vietnam. Grocery chain Walmart had also just started trading as a public entity on the New York Stock Exchange. Now, there is no official list of the original Nifty Fifty from what I can find (each publication differing slightly in the composition), but for the purposes of this demonstration it doesn’t really matter.
You decide to invest $100 in each of the Nifty shares. Alongside Walmart, the holdings include the likes of Coca-Cola and McDonald’s. The total investment amounts to $5,000 in 1972 money, equivalent to around $28,000 today after inflation. Let’s just examine the returns of the three stocks mentioned above, starting with Coke. One-hundred bucks invested in Coca-Cola stock in 1972 would be worth around $6,110 today. The same hundred dollars invested in McDonald’s stock would be worth around $8,990. In the case of Walmart, the comparable figure is a massive $107,429. That’s not a typo – Walmart returns really have been that spectacular.
The after-inflation return factor on the $5,000 starting capital is 4.5 fold. That’s excluding the other 47 stocks and excluding the contribution of thousands of dollars in dividend cash that got paid out over the years. The 137 shares of Coca-Cola stock would generate $189 in annual dividend income this year alone. The 70 shares in McDonald’s would throw off $240.80 in annual dividend cash. Amazingly, the 1,552 shares of Walmart stock would pump out dividend income worth $3,041.
That’s just three stocks out of the fifty that we started with. That’s ignoring some great names like Walt Disney, Procter & Gamble, Philip Morris and PepsiCo. Suffice to say, they enhanced the returns even more. Heck, it ignores all of the dividends that would have been paid over that nearly 45-year timeframe too. Of course there are some bad performers, even some total wipeouts like Kodak. Picking up a few big winners more than makes up for it.
This is partly why investors shouldn’t fear the kind of nasty bear markets that affected the Nifty Fifty back in the 1980s, or the financial crises of 2000 and 2009. As long as there is a good degree of diversification among high quality companies, the risk of permanent capital impairment is minimal. What is also interesting is the role that value played in the subsequent returns. Nifty Fifty stocks traded as high as 60x their earnings during the bull market. Growth rates were obviously higher back then compared to today, but it shows that very high quality holdings will ultimately deliver strong returns if left for a long enough period of time.
On average, those fifty or so stocks did end up justifying their high valuations. Yes, there were a few big losers. But they were ultimately dwarfed by the big winners like Walmart. There will always be very volatile periods with equities, as any investor who witnessed the 70%-plus loses on some of those Nifty Fifty shares will know. The overall lessons, though, are clear. Stick to high quality blue chips and ensure you are adequately diversified. Most importantly, hold for the long haul. Investors who follow those principles can still generate the substantial wealth that the original Nifty Fifty are now famous for.
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