Advertisement

Lessons for investors from the “go-go years”

The fate of the Nifty Fifty stocks reminds should remind investors that it’s dangerous to pay too much for the certain winners of tomorrow.

I’ve been thinking a lot about the late 1960s and the parallels with today. Not because of protests in America, Hong Kong and elsewhere. Not because of the pandemic sweeping around the globe – influenza then, coronavirus now. Not because of the spectre of conflict (the Vietnam war, the looming US-China cold war). Those comparisons are valid – there are good reasons why people are starting to describe 2020 as the worst year since 1968. But it’s really the US stockmarket of 40 years ago that interests me. 

Advertisement - Article continues below

The 1960s were the go-go years, to quote the title of a contemporary history by the journalist John Brooks. Solid growth and a climate of optimism created a strong bull market. But by the end of the decade, a small number of stocks were driving the gains. These were known as the Nifty Fifty – there was never a single list of 50 stocks, but the usual candidates include many familiar names such as Polaroid, McDonald’s, Johnson & Johnson, Coca-Cola and Hewlett-Packard. These were know as “one-decision stocks” – all you had to do was buy and hold them indefinitely.

Advertisement
Advertisement - Article continues below

The market faltered in 1968, with the S&P 500 dropping 33% over the next 18 months. It recovered to set new highs in late 1972, by which point the Nifty Fifty were typically trading on price/earnings (p/e) ratios of 40-50 or more (Polaroid peaked on around 90). Then it plunged into a vicious bear market from 1973 to 1974.

Advertisement - Article continues below

Today, the US again depends on a handful of high-growth names. Exclude Alphabet, Amazon, Apple, Facebook, Microsoft and Netflix from the S&P 500 and the remaining S&P 494 would be only modestly ahead of the rest of the world over the last five years, according to calculations by Gerard Minack of Minack Advisors. The strength of the US rebound since March is entirely due to these stocks and their peers, such as Adobe, Nvidia and PayPal. They were stars before the pandemic; now, they are seen as sure winners from a changing world. Valuations now range from surprising low for Apple (25) to quite steep for Amazon (118).

Not all the Nifty Fifty were bad long-term investments – some eventually beat the S&P 500. Those in consumer staples or healthcare and with less extreme p/e ratios of 30-40 tended to do better – the only spectacular success of a high-priced stock was Walmart, which, despite a p/e of over 50, returned more than twice as much as the index. But all suffered badly in the mid 1970s due to their steep valuations. In the same way, some of today’s stars will be long-term successes. But the history of the Nifty Fifty suggests their high valuations are vulnerable to the unexpected – and by extension, so is a bull market that is heavily dependent on them.

I wish I knew what technical analysis was, but I’m too embarrassed to ask

Technical analysis refers to the use of trends in market data – such as the price of securities and volume traded – to attempt to forecast the future direction of markets. It does not take account of fundamental data such as a company’s earnings. Instead it focuses solely on how   individual securities and groups of securities are trading. 

Advertisement - Article continues below
Advertisement
Advertisement - Article continues below

Users of technical analysis argue that the collective actions of buyers and sellers mean that all available fundamental information should already be reflected in current prices. However, the way in which investors interact as they respond to the flow of new information creates recurring patterns of behaviour, so recognising these patterns may allow chartists to anticipate what is likely to happen next. 

There are a large number of technical analysis indicators, some of which are quite complex. However, the core of this strategy is the idea that prices trend – ie, tend to move up, down or sideways over a period of time. So the simplest approaches revolve around looking at these price trends on charts – hence technical analysts are known as chartists. An analyst may look at trend indicators such as the moving average over, say, the last 50 days, as well as price patterns that they believe indicate whether the trend is likely to change. These may include resistance (a price that the security has not been able to exceed) and support (which it does not fall below).

Technical analysts may also look at relative strength (how well certain stocks and sectors are doing compared with others) and breadth (how many stocks are rising compared with the amount that are declining). Some will also employ a range of numerical indicators that aim to measure sentiment towards a security or the wider market. Momentum indicators look at how quickly prices are changing, volatility indicators focus on how volatile prices are and volume indicators are based on the amount being traded.

Advertisement
Advertisement

Recommended

The British equity market is shrinking
Stockmarkets

The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019
Should Big Tech be broken up?
Tech stocks

Should Big Tech be broken up?

The dominance of the big four technology giants has attracted the attention of politicians determined to humble them. But what real harm are they doin…
8 Aug 2020
Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
7 Aug 2020
The MoneyWeek Podcast: how to age well and profit from the “longevity dividend”
Investment strategy

The MoneyWeek Podcast: how to age well and profit from the “longevity dividend”

Merryn talks to economist and author Andrew J Scott and discusses how we can profit from the "longevity dividend" as we live longer; why we need to re…
6 Aug 2020

Most Popular

Eagle Lightweight GT: the reincarnation of the E-type Jag
Toys and gadgets

Eagle Lightweight GT: the reincarnation of the E-type Jag

Jaguar’s classic E-type sports car has been reinvented for the modern age. The result – the Eagle Lightweight GT – is a thing of beauty.
7 Aug 2020
Platinum: the precious metal that looks set to play catch-up with silver and gold
Silver and other precious metals

Platinum: the precious metal that looks set to play catch-up with silver and gold

Gold and silver continue to soar, but there's still time to get in. And there's another precious metal that looks set to go on a bull run too, says Jo…
7 Aug 2020
The MoneyWeek Podcast: how to age well and profit from the “longevity dividend”
Investment strategy

The MoneyWeek Podcast: how to age well and profit from the “longevity dividend”

Merryn talks to economist and author Andrew J Scott and discusses how we can profit from the "longevity dividend" as we live longer; why we need to re…
6 Aug 2020