Back in the late 1960's, Wall Street became enthralled with a group of stocks dubbed The Nifty Fifty. Perhaps the online encyclopedia Wikipedia sums it up best, "[These stocks] had everything going for them - brand names, patents, top management, spectacular sales, and solid profits. They were thought to be best stocks to buy them and hold them for the long run, and that was all you needed to do. These were the stocks 'dreams' were made of ...for the long haul to retire with."
Here's a list of those stocks. You probably recognize most of them.
- American Express
- American Home Products
- AMP
- Anheuser-Busch
- Avon Products
- Baxter Labs
- Black & Decker
- Bristol-Myers
- Burroughs
- American Hospital Supply Corp.
- Chesebrough-Ponds
- The Coca-Cola Company
- Digital Equipment Corporation
- Dow Chemical
- Eastman Kodak
- Eli Lilly and Company
- Emery Air Freight
- First National City Bank
- General Electric
- Gillette
- Halliburton
- Heublein Brewing Company
- IBM
- International Flavors and Fragrances
- International Telephone and Telegraph
- J.C. Penney
- Johnson & Johnson
- Louisiana Home and Exploration
- Lubrizol
- Minnesota Mining and Manufacturing (3M)
- McDonald's
- Merck & Co.
- M.G.I.C. Investment Corporation
- PepsiCo
- Pfizer
- Philip Morris Cos.
- Polaroid
- Procter & Gamble
- Revlon
- Schering Plough
- Joe Schlitz Brewing
- Schlumberger
- Sears Roebuck & Co.
- Simplicity Patterns
- Squibb
- S.S. Kresge
- Texas Instruments
- Upjohn
- The Walt Disney Company
- Xerox
The fatal flaw in this logic is that investors believed that these companies - enterprises such as Eastman Kodak and Xerox - were so inherently good that they could (and should) be bought at any price. Of course, you know from our article Price is Paramount that this is simply not the case; a stock trading at a price to earnings ratio of 60 is virtually guaranteed to generate a rate of return less than that of a risk-free U.S. Treasury bonds (there are a few notable exceptions which, obviously, is what every trader thinks they are getting. Still, the risks simply aren't worth it given the permanent damage to your net worth if you turn out to be wrong). These issues are priced to perfection with no margin of safety. Indeed, a mere blip in operating performance can cause a catastrophic loss of principal as fickle speculators flee to hotter sectors and securities.
The bottom line: Although an excellent business is a great place to start in your search for value, it doesn't mean that when you find them, they will all make great investments.
