Collection: Mohnish Pabrai - #70 'Nifty Fifty'


Video Link: https://youtu.be/isc5hbv5Has


In this episode, Mohnish Pabrai talks about the crash of 1973-94 and NYSE Nifty Fifty during the early 1970s and why it failed?


In this episode, you’ll learn:

  • The Crash of 1973-74.

  • NYSE Nifty Fifty during the early 1970s.

  • Why the idea of Nifty Fifty failed?

To check out all Collection: Mohnish Pabrai <click here>

[Transcript]

(Source: https://youtu.be/7F2IGzES7Uc)

MOHNISH PABRAI 00:00

So and you know just to continue this discussion a little bit more. Like I said bubbles are very common, they don't just happen every 40 years, they're happening all the time.


So in the early 70s, there was this notion called Nifty Fifty where these banks and trust companies had come up with the idea that you know, you just buy great businesses at any price and then you hold them forever. And if you do that you will end up doing really well.


And there were these 50 of Blue Chip companies, companies like Disney, McDonald's, Coca-Cola, Kmart, Xerox, Digital, Avon and so on. And since everyone wanted to buy these stocks and hold them forever, they went up to a ridiculous multiples.


You know, so if you looked at the P/Es in 1972 like you know McDonald's were at 86 times earnings, and Disney were at 82 times earnings, and you know Polaroid were at 91 times earnings and so on so forth.


So these things really became very popular and so the market basically was a bipolar market, you had very high valuations on these top 50 and then you had kind of – for the rest of the market kinda getting ignored.


And then you know, we had the crash of 1973-74. And of course, in 1973-94 what happened is that we had the Arab Oil Embargo, we had for the first time in the United States rationing of gasoline and long lines at the pump, and people are not able to get gas, and we had a president would impose price controls, and we had the impeachment of US president for the very first time. And so you had a whole bunch of different factors coming in.


And in fact, what happened to the Nifty Fifty – and in fact, the crash of 73-74 was actually worse than the 1929 crash because the 1929 crash took place over a short period of time.


This was a very slow motion crash, it took place over 2 years, but if you look at the end to end dropped from top of 72 to bottom of 74, it was a huge I would say something like more than a 60% drop in stock price over that period.


And so the Nifty Fifty initially, people followed the advice which is you hold these stocks forever. So all these earthshaking events were taking place and the market started dropping but the Nifty Fifty stayed intact because people kept with it.


And then as the bad news just kept coming in, the Nifty Fifty was taken out back and shot one by one – (Laughter) – in the words of a Forbes columnist. And so you saw, you know, 90% – 80% drop in prices of these Blue Chips like Disney and Coke and so on. And so that was pretty brutal, so the Nifty Fifty didn't worked out so well.

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