Robert Tyerman ponders the lessons that investors can learn from the ‘Nifty Fifty’ stock enthusiasts of the early 1970s.

Ask many fund managers about their strategies now that confidence has re-stimulated short-term market projections, fuelled by monetary profligacy and gigantic government deficit spending, and you will hear a familiar refrain: ‘What we look for are companies with established niche market positions, proven management and future earnings visibility, not subject to economic cycles.’

This winning formula sounds beguiling in a world unsure if it is recovering briskly from a sharp economic downturn or teetering on the edge of depression. It is, in effect, a return to the ‘growth company’ dogma that held Wall Street and other stock markets in thrall 40 years ago. 

The Nifty Fifty
Back then, the smartest stockpickers had identified a group of companies that seemed to generate consistent earnings growth of 10 to 15 per cent in real terms and showed no signs of slowing down. They became known as the ‘Nifty Fifty’ and included corporations such as American Express, Coca-Cola, Dow Chemical, Gillette, IBM, Minnesota Mining and Manufacturing, Polaroid, Sears Roebuck, Walt Disney and Xerox.

Wall Street pundits dubbed these companies the ‘one-decision stocks’, meaning you bought from time to time, whatever the price, and never sold. There was no need to worry about playing economic or financial market cycles, competition, government intervention or business setbacks: the Nifty Fifty would see you through.

One consequence of this philosophy was that its adherents – and they had the biggest clout on Wall Street in those days – pushed the valuations of the favoured one-decision stocks to awesome heights.

Don’t believe the hype
Prospective price-to-earnings ratios of 50 or more were common, and some stocks, such as Polaroid, traded on multiples close to 100, discounting interrupted earnings growth for years into the future.

Needless to say, dividend yields fell to derisory levels, mere fractions of today’s 0.5 per cent Bank of England base rate, loosening the link between a company’s success and its shareholders’ rewards. Long-term growth was the goal, and the majority of companies outside the charmed growth circle had a tough row to hoe in the investment world.

The future, however, did not work out as the growth enthusiasts had hoped. The growth stocks’ very success and lavish ratings made them vulnerable to any interruption in their quarter-by-quarter earnings progress. New technologies and new companies arose to challenge the one-decision stocks. As time went by, the fancy multiples shrank and some fingers were burnt.

Smell a rat?
Many suffered the fate that was in later years to befall those who backed the British pest control and domestic products group Rentokil. The company was chaired by the ebullient Sir Clive Thompson, known as ‘Mr 20 per cent’, because he had committed Rentokil to achieving that rate of profits growth or more every year. Once that stopped, he and investors had a distinctly uncomfortable experience.

Of course, companies can sometimes come from nowhere to become world giants, like Microsoft, usually on the back of owning some pioneering technological breakthrough. But such growth does not go on forever, whatever breathless analysts may suggest.

In capitalist, and probably all, economies, the cycle is a law of nature. Japan was once supposed to have detached itself from the business cycle, until the 1990s decade of stagnation put paid to that notion.

The same was said about the USA in the Ronald Reagan era. More recently, Britain under the benign tutelage of chancellor and then prime minister Gordon Brown had apparently done away with ‘boom and bust’. We all know what happened. There is no formula ensuring continual painless growth, and there are no ‘one-decision stocks’ to lock up and forget about.