One of the must read investment blogs is John Mauldin’s weekly Thoughts From the Frontline. This week’s post is a particularly compelling guest post from tech investor Andy Kessler.
Kessler’s post is the forward to George Gilder’s book Knowledge and Power and in describing his investment journey Kessler mentions the 1970s Wall Street view of investing in Nifty Fifty, the fifty biggest stocks on the US market which – because they were perceived as safe investments – traded on substantial price equity ratios.
Trading cost 75 cents a share, but who cares, there were only 50 stocks that mattered, the Nifty Fifty, and you just bought ’em, never sold.
Towards the end of 1972, Xerox traded for 49 times earnings, Avon for 65 times earnings, Polaroid for 91 times earnings.
Numbers like that were unsustainable and those days of safe investing couldn’t last. So what happened to The Nifty Fifty?
It’s hard to track down today’s figures but an academic paper from 2002 looked at how those stocks performed over the following thirty years. It isn’t pretty.
Few of the Nifty Fifty performed well over the subsequent thirty years, which should give pause for those just buying the top stocks like the Dow-Jones, FTSE 100 or ASX 20 – just because they are big doesn’t mean they are safe.
In fact names like Eastman-Kodak, Polaroid and Digital Equipment Corporation on the Nifty Fifty shows just how risky such assumptions are.
Kessler also has a good point about today’s index huggers who are the modern equivalent of the 1970s buyers of the Nifty Fifty.
An index is the market. It’s a carrier, a channel, as defined mathematically by Shannon at Bell Labs in his seminal work on Information Theory. An index can only yield the predictable market return, mostly devoid of the profits of creativity and innovation, which largely come from new companies outside the index.
Like the Nifty Fifty today’s index funds are safe and predictable – until they’re not – while at the margins, the next great businesses and industries are being built far from the attention of the funds managers.
For Australians there’s a particular sting in the tail from Kessler’s post as the bulk of compulsory superannuation goes into the local market’s stop stocks. It wouldn’t be too unfair to describe the modern Aussie funds manager’s motto as being “buy the ASX Eight and have lunch with your mate.”
Forty years ago, an investment in Eastman Kodak would have looked pretty nifty. Today Kodak has gone. We should remember that when we’re looking for ‘safe’ places to put our money.
Bull Market image by Myles through SXC.HU