“Obviously the problem was not with the companies but with the temporary insanity of institutional money managers-proving again that stupidity well-packaged can sound like wisdom. The delusion was that these companies were so good it didn’t matter what you paid for them their inexorable growth would bail you out. “What held the Nifty Fifty up? The same thing that held up tulip-bulb prices in long-ago Holland-popular delusions and the madness of crowds. Forbes magazine retrospectively commented on the phenomenon as follows: Since they had made so many rich, few if any investors could fault a money manager for buying them.Īt the time, many investors did not seem to find 50, 80 or even 100 times earnings at all an unreasonable price to pay for the world’s preeminent growth companies. The Nifty Fifty were often called one-decision stocks: buy and never sell.īecause their prospects were so bright, many analysts claimed that the only direction they could go was up. This last characteristic enabled institutions to load up on these stocks without significantly influencing the price of their shares. All of these stocks had proven growth records, continual increases in dividends (virtually none had cut its dividend since World War II), and high market capitalization. The Nifty Fifty were a group of premier growth stocks, such as Xerox, IBM, Polaroid and Coca-Cola, that became institutional darlings in the early 1970s. After the 1973–74 bear market slashed the value of most of the “Nifty Fifty,” many investors vowed never again to pay over 30 times earnings for a stock.īut is the conventional wisdom justified that the bull market of the early 1970s markedly overvalued these stocks? Or is it possible that investors were right to predict that the growth of these firms would eventually justify their lofty prices? To put it in more general terms: What premium should an investor pay for large, well-established growth stocks? And it was not just the public, but large institutions as well that poured tens of billions of dollars into these stocks. These stocks are often held up as examples of speculation based on unwarranted optimism about the ability of growth stocks to continue to generate rapid and sustained earnings growth. This article examines a group of high-flying growth stocks that soared in the early 1970s, only to come crashing to earth in the vicious 1973–74 bear market.
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