In 1972, the Morgan Guaranty Trust (in conjunction with a few other investment advisory companies) launched an advertisement push called the “Nifty Fifty” that proclaimed certain American companies were so dominant, they should be purchased and never sold. The intuitive appeal of this argument was obvious—people will always need food, beverages, medicine, and so on—and the companies included on the list all had excellent records of making shareholders rich, with the popular terminology at the time calling them “blue-chip stocks” rather than “dividend growth stocks.”
But there was a problem with the timing of this list: many of the companies were trading at lofty valuations that have only been seen three times in American history (the late 1920s and late 1990s being the others) with Coca-Cola trading at 48x profits, Johnson & Johnson trading at almost 60x profits, McDonald’s trading at 71x profits, and so on. Here, in a moment of sobriety, we can see how foolish that was.
Yet, here is what I find interesting, if you by some chance put $1,000 into each of the fifty stocks on the original list, only four of the fifty stocks went on to deliver negative returns over the next 43 years. Polaroid, Burroughs, Emery Air, and MGIC were the stocks that would delivered negative returns.
You would have trounced the S&P 500 even if you bought at the mountaintop of 1972 valuations, but it is important to understand why: Wal-Mart and Philip Morris International did a disproportionate amount of the heavy lifting. Wal-Mart delivered 19.2% annual returns, so that the $1,000 investment would have grown into $2,200,000. The old Philp Morris delivered 18.5% returns, so that $1,000 grew into $1,400,000 (what a different 0.7% makes over forty-three years, eh?). The growth of Wal-Mart, and the significant outperformance of the tobacco stock that is now Altria, Philip Morris International, Kraft, and Mondelez, play an outsized role in explaining why even buying the Nifty Fifty stocks at absurd valuations still led to results that beat the S&P 500 over the next forty-three years.
But here is what has caught my attention about the Nifty Fifty: the incredibly low money loss rate. Only four of those fifty stocks cost you money 43 years later. The only companies you could have bought and lost money with were: Burroughs, Polaroid, Emery Air, and MGIC. The rest would have made you richer if you bought, sat on your rear, and held for the next forty-three years.
I think one of the reasons why this fact gets ignored by those who take a list of old recommended stocks is the effects of mergers and acquisitions. For instance, you may look at the list and see American Hospital Supply, and then assume that is a blue-chip stock that went defunct. Well, in 1985, Baxter International issued stock certificates to buy out American Hospital’s owners, so you would have earned 11.6% from 1985 through January 2015 on that American Hospital Supply stock that got turned into Baxter.
Chesebrough Ponds became a part of Unilever, Squibb became “Bristol Myers Squibb”, and on the list goes. Schlitz Brewing got purchased by Stroh Brewing in an all-cash transaction. Heublein, perhaps the most obscure of all the companies on the original Nifty Fifty list, turned out to be the most lucrative of all—it got bought out by RJR Nabisco and then R.J. Reynolds, and turned into a tobacco fortune that compounded at 19% since 1982 (this assumes that, after it got taken private in the 1989 leveraged buyout, you bought shares of R.J. Reynolds when they became publicly available). The point is that those companies you may no longer recognize often got consumed by larger companies that continued to build wealth, with the “failure” rate of the Nifty Fifty being that 8% of the individual stocks would have lost you wealth over the next 43 years.
Of course, in addition to Wal-Mart and Philip Morris International, you would have purchased many stocks that would have made you quite rich—even taking into account the high valuation apparent in 1972. Gillette returned over 16% annually before getting purchased by Procter & Gamble. Coca-Cola compounded at 14.5% annually to the present day. General Electric, despite its very significant troubles in 2008 and 2009, still returned over 13% annually from 1972 to the present day. Johnson & Johnson, Pepsi, Procter & Gamble, 3M, and Walt Disney have all returned between 12% and 15% annually from 1972 through the start of 2015.
The lesson here isn’t that it’s okay to pay things like 71x profits for McDonald’s. If you do something like that, it will take 3+ decades for you to burn off that excess weight of overvaluation and then earn actual returns in line with the S&P 500 at large. Instead, the point is this: If paying an expensive price for a blue-chip stock works out over time, imagine what happens when you pay an intelligent price for something like Chevron and scoop it up at $105 per share and hold it for the long haul. It also highlights how few blue-chip stocks actually fail over very long periods of time—the reason there are so many unknown names is the result of merger/acquisition activity rather than actual business failure. Wealth is lost when you do things like sell McDonalds, GlaxoSmithKline, IBM, Coca-Cola, and Exxon upon seeing disappointing short-term news; history shows that selling, rather than holding, is responsible for the bulk of an investor’s troubles.
Originally posted 2015-01-26 10:27:28.