Author Topic: "The Nifty Fifty" - yesterday and today  (Read 11686 times)

KinAlberta

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"The Nifty Fifty" - yesterday and today
« on: March 07, 2015, 01:16:32 PM »
I have credit whoiswarrenfor posting this 1998 AAII Jeremy Siegel, Nifty Fifty Revisited article (see reference below).

Current thoughts from the participants of this board would be welcome.



From the article:

"In 1975 there was no way of knowing which explanation was correct. But 25 years later we can determine whether the Nifty Fifty stocks were overvalued in 1972. Examination of their subsequent returns shows that the second explanation, roundly rejected by Wall Street for years, is much closer to the truth. A portfolio of Nifty Fifty stocks purchased at the peak would have nearly matched the S&P 500 over the next 26 years. ... "

http://www.aaii.com/journal/article/valuing-growth-stocks-revisiting-the-nifty-fifty



As an aside, I've always wondered if Warren Buffett hadn't long ago figured out that an index of stocks would outperform all other indexes if he could just weed out the companies that cause the churn and slowly accumulate (at opportunistic prices) just own the most permanent of growth companies. 

A question I once asked Burton Malkiel was basically, how could an arbitrary number of 500 stocks beat every fund manager? Could not someone sitting and holding a subset or larger set, say the S&P 278 or S&P 402 or S&P 555, etc. beat the S&P 500?


I've decided my favourite ever deal would be if these guys bought Lancashire ;)



In fact, I don't want to see anyone buy Lancashire, as I think its worth is far higher than what anyone out there would be willing to pay.  It's a quality company and I think the market systematically undervalues such entities (and overvalues crappy ones).  I think this explains why investors didn't necessarily overpay for the quality companies that made up the "Nifty Fifty", even though they looked very expensive on static valuation metrics (averaging c.42x P/E in 1972, more than twice the then P/E of the S&P500).  Yes, their stock prices subsequently fell, but over the subsequent years their fundamentals shone through so that a basket of Nifty Fifty stocks bought at the peak would have performed as least as well as the market to date (I suspect performance has been much better). See this article, written in 1998 http://www.aaii.com/journal/article/valuing-growth-stocks-revisiting-the-nifty-fifty

As for Leucadia, as opportunistic value investors they will seek to capitalise on market dislocations or misfortunes begetting individual situations.  I severely hope Lancashire doesn't fall into either of these categories (!!) and that both companies can continue to grow their intrinsic values over time.

Yes
« Last Edit: March 07, 2015, 01:33:34 PM by KinAlberta »


oddballstocks

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Re: "The Nifty Fifty" - yesterday and today
« Reply #1 on: March 07, 2015, 01:21:15 PM »
I have had some people tell me that there is no bad price paid for a good company.  I guess at some point if you wait long enough maybe it'll work out?

The question I have is "what is a good company?" or "what is great?"

Maybe a better conclusion is that market leaders rarely completely fail, and given a long enough time frame an investor will do alright with a market leader.  The question is whether investors have the conviction to hold regardless of price paid.
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thepupil

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Re: "The Nifty Fifty" - yesterday and today
« Reply #2 on: March 07, 2015, 01:30:47 PM »
I love this article and have read it a few times over the years. One problem with it is that many of those same companies were pretty richly valued at the time of the article's publishing; the valuations o megacap growthy companies in the late 90's helped justify the rich valuations of the Nifty Fifty.

For example, KO was $38 per share in August 1998 (when the article was published). It's $41 now and performed quite poorly on an absolute basis if you purchased (or did not sell it) then.

I don't have the time or desire to go through the rest, but I would imagine you would find similar examples in other companies. There needs to be a "re-visiting of the re-visiting of the Nifty Fifty".

I'm all for a long term approach and time arbitrage. But I think the article's premise is a little flawed.

KinAlberta

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Re: "The Nifty Fifty" - yesterday and today
« Reply #3 on: March 07, 2015, 01:37:28 PM »
Years ago Bill Gates commented on the high valuation of Microsoft (at the time) saying something to the effect that that it was crazy because Microsoft had nowhere near the potential longevity of Berkshire Hathaway... And that basically the market didn't appreciate BRK.

KinAlberta

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Re: "The Nifty Fifty" - yesterday and today
« Reply #4 on: March 07, 2015, 01:39:35 PM »
I love this article and have read it a few times over the years. One problem with it is that many of those same companies were pretty richly valued at the time of the article's publishing; the valuations o megacap growthy companies in the late 90's helped justify the rich valuations of the Nifty Fifty.

For example, KO was $38 per share in August 1998 (when the article was published). It's $41 now and performed quite poorly on an absolute basis if you purchased (or did not sell it) then.

I don't have the time or desire to go through the rest, but I would imagine you would find similar examples in other companies. There needs to be a "re-visiting of the re-visiting of the Nifty Fifty".

I'm all for a long term approach and time arbitrage. But I think the article's premise is a little flawed.

Ahh but with the dividends and the lack of tax on capital gains for a buy and hold investor, etc... I wonder how they have performed on an aftertax basis by today.

Pelagic

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Re: "The Nifty Fifty" - yesterday and today
« Reply #5 on: April 10, 2015, 10:31:15 AM »
I recently read Howard Mark's book The Most Important Thing and he too made mention of the "Nifty Fifty" and the expectations associated with them at the time. He did concede that the Nifty Fifty actually outperformed the S&P 500 (I don't recall the time period he used) almost entirely thanks to the growth of Phillip Morris. The lesson of the Nifty-Fifty as I see it isn't so much the relative overvaluation associated with some of the stocks at the time, it's that a couple truly great stocks can make up for a lot of mediocre ones, even if they were all overvalued when they were purchased. Now, how do we find the next Phillip-Morris in today's "Nifty-Fifty"  ;)

Schwab711

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Re: "The Nifty Fifty" - yesterday and today
« Reply #6 on: April 10, 2015, 10:02:51 PM »
I recently read Howard Mark's book The Most Important Thing and he too made mention of the "Nifty Fifty" and the expectations associated with them at the time. He did concede that the Nifty Fifty actually outperformed the S&P 500 (I don't recall the time period he used) almost entirely thanks to the growth of Phillip Morris. The lesson of the Nifty-Fifty as I see it isn't so much the relative overvaluation associated with some of the stocks at the time, it's that a couple truly great stocks can make up for a lot of mediocre ones, even if they were all overvalued when they were purchased. Now, how do we find the next Phillip-Morris in today's "Nifty-Fifty"  ;)

Takeaway I've always had is that if you can identify the PM's then you don't have to worry about valuation most of the time. 20x - 25x is actually cheap/reasonable if the company can grow earnings 15% over 15 years or something. Obviously identifying this is tough but it seems like the lowest risk way to earn 15%+ returns over long periods. It also seems possible.

Uccmal

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Re: "The Nifty Fifty" - yesterday and today
« Reply #7 on: April 11, 2015, 04:21:37 AM »
I have had some people tell me that there is no bad price paid for a good company.  I guess at some point if you wait long enough maybe it'll work out?

The question I have is "what is a good company?" or "what is great?"

Maybe a better conclusion is that market leaders rarely completely fail, and given a long enough time frame an investor will do alright with a market leader.  The question is whether investors have the conviction to hold regardless of price paid.

It would be more valuable to determine if anyone actually held onto these for 25 years.  My guess is not many.  Could we (they) have held onto Philip Morris through all the lawsuits, mergers etc. 
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jschembs

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Re: "The Nifty Fifty" - yesterday and today
« Reply #8 on: April 11, 2015, 07:40:52 AM »
Thanks for posting.

What I find most worrying is the degradation in standards for what's considered a quality growth company. Back then, the Nifty Fifty "had proven growth records, continual increases in dividends (virtually none had cut its dividend since World War II), and high market capitalization."

Compare that to many of the "buy and forget" great companies today (Visa, Mastercard, big pharma, Google, Apple, the "roll ups"). Few offer much in the way of dividend yield, preferring to utilize share repurchases to return capital. For a company trading at 30+ earnings, I think I'd much prefer them to boost dividends. Given much of these buybacks are fueled with debt, it'd be interesting to see EV/EBITDA or EV/FCF for today's buy and forget companies compared to the Nifty Fifty.

Further, the more speculative buy and forget companies (Amazon, Salesforce, Netflix, Zillow, Workday) haven't established any track record of generating superior (or even value-creating) returns on invested capital, yet they are certainly given the benefit of the doubt by Mr. Market. I'm sure there were equally speculative names beyond the Nifty Fifty more comparable to these names, but the broader theme in my mind is that what equity investors are willing to accept has largely continuously degraded over the years. For example, stock dividend yields in the first half of the 20th century routinely were in excess of corporate bond yields. Now certainly part of this is reasonable - better financial reporting, more oversight and disclosures, a general increase in comfort among the populous in owning future earnings streams as opposed to "gentlemen prefer bonds."

However, as corporate finance theory continues to eschew the notion of free cash flow (which I'm certainly a proponent of), I think we're getting further away from what the goal of that free cash flow is - to return cash to investors. Buybacks at any price is not a reasonable approach in my opinion, but that's a different discussion. Perhaps it's part of a more worrying development - demographics and the difficulty to grow an increasingly large economy makes growth in general very difficult to achieve, so investors are hoodwinked into "we need to plow earnings back into the company to grow," even if the realistic long-term growth rates may be unachievable.

Anyway, just a tangent I've been thinking about lately.

ItsAValueTrap

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Re: "The Nifty Fifty" - yesterday and today
« Reply #9 on: April 11, 2015, 08:45:59 AM »
However, as corporate finance theory continues to eschew the notion of free cash flow (which I'm certainly a proponent of), I think we're getting further away from what the goal of that free cash flow is - to return cash to investors.

Buybacks versus dividends:  It's not a big difference either way, buy buybacks are arguably more tax-efficient.

I don't think that Visa buying back shares at a P/E of 30 is a terrible idea.  Neither brilliant nor stupid.

Because interest rates are really low right now, the debt-fueled buybacks kind of make sense.

Free cash flow: With netflix, valuing the business on current free cash flow doesn't make that much sense.  It's the nature of their business that they have lose money in the beginning, just like the cable channels did when they were starting out.  I don't think FCF is the right way of valuing cable channels and online subscription services.

Salesforce has plenty of free cash flow.  If you look at cash from ops - capex and divide that by the share count, you see that number grow over time. 

2- Maybe I'm crazy but I think a portfolio of V, MA, NFLX, Z, AAPL, big pharma, AMZN, CRM, WDAY will do alright.  The level of fraud is really low and the valuations are reasonable.  The quality of those companies is above average.
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