The Nifty Fifty and the Magnificent Seven

In the US, the term “nifty fifty” was an informal designation, in the 1960s and 1970s, for a group of roughly fifty large-cap stocks on the New York Stock Exchange that were widely regarded as solid buy and hold investments.  The stocks were often described as “one-decision”, as they were viewed as extremely stable, even over long periods.  The most common characteristic of the constituents was solid growth, for which these stocks were assigned extraordinarily high PE ratios. Trading at 50 times earnings was common, far above the long-term market average of about 15 to 20.

Fast forward to now and the “magnificent seven”, with substantially the same characteristics as the “nifty fifty”, that have become the new darlings of portfolio managers.

Focused portfolio strategies are nothing new, but may lead to an over concentration and the perception that portfolio management can be a one and done strategy.  Investors should consider that many of the companies included in the “nifty fifty” have significantly underperformed over the last 50 years and many have essentially disappeared.  Think Eastman Kodak, Polaroid and Xerox, to name a few.

Clever strategies may come and go, but the overall market, as measured by the popular averages, such as the S&P 500, soldier on, and, has, over time, provided significant returns.  

Perhaps, sometime in the future we may have self-driving cars, but portfolio management will remain a hands-on discipline.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA