The Winds of Change
Comment of the Day

November 24 2021

Commentary by Eoin Treacy

The Winds of Change

Thanks to a subscriber for this memo from Howard Marks which covers a number of topical points. Here is a section on the Nifty 50:

One of the biggest changes that did take place in the 1960s was the emergence of “growth investing” via fast-growing companies, many of which were quite new. The “Nifty Fifty” I talk about so much ruled the stock market in the late 1960s: this group included office equipment manufacturers IBM and Xerox, photography titans Kodak and Polaroid, drug companies like Merck and Eli Lilly, tech companies including Hewlett Packard and Texas Instruments, and advanced marketing/consumer goods companies such as Coca-Cola and Avon.

These companies’ stocks carried very high price/earnings ratios, reaching up to 80 and 90. Obviously, investors should only pay multiples like these (if ever) if they’re sure the companies will be preeminent for decades to come. And investors were sure. In fact, it was widely believed that nothing bad could happen to these companies and they could never be disrupted. This was one of post-war America’s first major brushes with newness and – in a good example of illogicality – investors embraced these companies, with their revolutionary newness, but somehow assumed that a newer and better new thing could never come along to displace them.

Of course, those investors were riding for a fall. If you bought the stocks of “the greatest companies in America” when I started working in 1969, and held them steadfastly for five years, you lost almost all your money. The first reason is that the multiples in the late 1960s were far too high, and they were gutted in the subsequent market correction. But, perhaps more importantly, many of these “forever” companies turned out to be vulnerable to change.

Eoin Treacy's view

Technological innovation is highly disruptive. It upends the familiar ways in which processes were followed and creates value along the way. It also causes significant social upheaval. The 1960s were remembered by investors for the success and ultimate failure of the Nifty 50 but by everyone else for the sexual revolution, fight for equal rights and anti-war movements. Upskilling of the population was also a significant factor during this time when typing pools gave way, albeit grudgingly, to women taking greater roles in business.

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