A Lesson From the 1929 Stock Market Crash
WHY YOU SHOULD CARE
The children of the Depression forgot the lesson of the ’29 Crash and suffered dearly for it. Today’s investors would be wise to keep that lesson in mind.
Investment fads usually run their course quickly and end badly. The Nifty Fifty captivated investors for the better part of a decade prior to its demise in 1973, but not before reviving the high-risk investing that had been out of vogue since the Crash of ‘29.
The 50 stocks identified by Morgan Guaranty Trust represented some of the fastest-growing companies on the planet in the latter half of the 1960s. Their popularity among institutional and individual investors sparked a quantum shift from “value” investing to a “growth at any price” mentality that resurfaced with a vengeance in the tech-stock bubble a quarter-century later.
The Nifty Fifty’s rise didn’t spring from a typical market mania.
“A lot of the build-up in the market [in the 1960s] was based upon the perception of America’s growing power and strength,” says Charles Geisst, a Manhattan College finance professor and author of Wall Street: A History. The 1973–74 market collapse that followed the Watergate break-in and disillusion with the Vietnam War “ended that period of naïve expectations for the future.”
The Nifty Fifty’s rise didn’t spring from a typical market mania, such as the 1920s excitement over mass production or the 1990s blind zeal over the promise of technology. Instead, it was owing to a change in the zeitgeist of Wall Street.
Depression Babies’ Buy-InThe group also contained market leaders whose fortunes would vastly fade a few decades hence. They included Eastman-Kodak and Polaroid, undone by digital photography; Simplicity Pattern, whose business slumped along with home sewing-machine sales, and S.S. Kresge, a retail chain founded in 1897 that in the 1970s morphed into now-struggling Kmart. Among the Nifty Fifty were fast-food pioneer McDonald’s; early technology titans IBM, Texas Instruments and Digital Equipment Corp.; soft-drink maker Coca-Cola, then expanding rapidly in foreign markets, and a department-store chain called Wal-Mart in the earliest stages of becoming the world’s largest retailer and private employer.
The Great Depression and World War II draped the nation in despair and uncertainty long after the ’29 Crash. In the ensuing years and up into the 1950s, Americans embraced conservative values that fostered a cautious attitude toward stocks. Risk-averse investors favored stable companies that paid out a sizeable share of profits in dividends, rather than reinvesting earnings in the company’s growth.
Enter the 1960s and the election of a young, charismatic president, the civil-rights movement, the Space Race and the belief that U.S. industry was becoming a juggernaut that would dominate the global economy. The Nifty Fifty embodied that new sense of economic manifest destiny, even through the turbulence of the decade’s second half.
Deemed “one-decision” stocks, the Nifty Fifty were meant to be bought and not sold. Unlike typical “buy-and-hold” stocks such as slow-growing but generous dividend-paying utility-company shares, investors were willing to pay unbounded prices for a piece of the Nifty Fifty pie.
Deemed “one-decision” stocks, the Nifty Fifty were meant to be bought and not sold.
That optimism was visible in a key measure of the stocks’ value: the price-to-earnings ratio or P/E — the price-per-share divided by the company’s annual earnings-per-share. By 1972 when the S&P 500 Index’s P/E stood at a then lofty 19, the Nifty Fifty’s average P/E was more than twice that at 42. Among the most inflated were Polaroid with a P/E of 91; McDonald’s, 86; Walt Disney, 82; and Avon Products, 65.
Along came the stock market collapse of 1973–74, where the Dow Jones Industrial Average fell 45% in just two years. It was driven by the end of the Bretton Woods monetary system, soaring inflation and the first of the 1970s oil crises. As a Forbes columnist described it, the Nifty Fifty “were taken out and shot one by one.” From their respective highs, for instance, Xerox fell 71 percent, Avon 86 percent and Polaroid 91 percent.
Several of the Nifty Fifty still rank among the world’s largest companies—including General Electric, Johnson & Johnson and Merck—and their stock values more than recovered through ensuing market cycles.
The lesson of the Nifty Fifty still bears repeating, Geisst says, especially since dot-com stock buyers ignored it and scarfed up shares in companies that didn’t even have P/E ratios — because they had no earnings at all.
“Investors who aren’t fairly diversified are going to get murdered in the marketplace,” Geisst says. “You can say the S&P 500 or the Nifty Fifty will make you rich, but they can also make you gray and die prematurely.”
This OZY encore was originally published April 1, 2014.