The meteoric rise of today’s tech giants, often compared to the Tech Bubble of the late 1990s, bears a striking resemblance to another era: the Nifty Fifty fad of the late 1960s and early 1970s. Are we partying like it’s 1972 all over again, and what can we learn from the Nifty Fifty’s eventual downfall?
The Nifty Fifty: A Historical Perspective
The Nifty Fifty weren’t speculative investments like the dot-com companies of the late 90s. They were established, profitable companies with strong earnings growth, considered “one-decision stocks” – buy and hold forever. However, high valuations ultimately led to years of disappointing returns starting in 1973. This raises a critical question: are today’s market leaders, particularly the FANMAG stocks (Facebook, Apple, Netflix, Microsoft, Amazon, and Google), following a similar trajectory?
Parallels Between Nifty Fifty and FANMAG
Both the Nifty Fifty and FANMAG share compelling characteristics: impressive earnings growth, high profitability, and significant market influence. The Nifty Fifty boasted over 22% annual earnings growth in the five years leading up to 1972, while FANMAG achieved almost 60% growth in the five years preceding 2020. Both groups enjoyed substantial profitability, with ROEs well above the S&P 500 average.
However, lofty valuations raise concerns. The Nifty Fifty traded at a P/E of 43 in 1972, more than double the S&P 500 average. FANMAG’s average P/E reached over 48 at the end of 2020, exceeding the inflated S&P 500 P/E of 39. Even pre-pandemic, in 2019, FANMAG’s P/E of 43.5 dwarfed the S&P 500’s 22.8. Such high valuations demand sustained, exceptional growth, which is inherently difficult to maintain.
Potential Challenges for FANMAG
Several factors could hinder FANMAG’s continued growth:
- Competition: Existing rivals and emerging players pose constant threats.
- Internal Competition: Overlapping business lines within FANMAG could lead to cannibalization.
- Regulatory Scrutiny: Antitrust investigations and privacy concerns present significant risks.
While FANMAG has navigated challenges successfully in the past, sustained growth becomes increasingly challenging as companies grow larger. History demonstrates that stocks with the highest growth expectations often underperform in the long run.
Lessons for Today’s Investors
The FANMAG stocks are undeniably successful companies, but their high valuations warrant caution. The Nifty Fifty serves as a reminder that even great companies can become overvalued, leading to disappointing returns. Diversification, including consideration of smaller and less expensive stocks, remains crucial for long-term investment success. As we navigate the current market landscape, remembering the lessons of the past can help us avoid repeating the mistakes of previous investment fads. Prudent investors should heed the warning signs and consider a more balanced and diversified approach to portfolio construction.
