“The best business at the wrong price is a bad investment.” - Warren Buffett
The 1970s "Nifty Fifty" episode is one of the most important and misunderstood lessons in market history, and Howard Marks often refers to it to illustrate the dangers of overpaying, regardless of business quality.
🧠 What Was the Nifty Fifty?
The Nifty Fifty were a group of ~50 large-cap U.S. companies that were considered one-decision stocks in the late 1960s and early 1970s. These were dominant, high-growth, high-quality businesses like:
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Coca-Cola
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IBM
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Polaroid
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McDonald’s
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Johnson & Johnson
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Xerox
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Disney
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Pfizer
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Procter & Gamble
They were considered so bulletproof that investors thought you could buy them at any price and just hold forever.
📉 What Happened in the 1970s?
By the early 1970s, these companies were trading at sky-high P/E ratios of 50–80x, compared to a market average P/E of 15.
Then came the crash (1973–74):
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The oil crisis, stagflation (high inflation + low growth), and tight monetary policy caused a major bear market.
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The S&P 500 dropped ~50% from 1973–1974.
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Many Nifty Fifty stocks fell even more — despite being great companies.
Here are some examples:
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Polaroid: -91%
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Avon: -86%
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Xerox: -71%
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McDonald's: -71%
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Disney: -68%
Even though these were quality businesses, the valuation bubble burst. Investors had paid too much for perfection.
💡 Howard Marks’ Key Lesson: “It’s not what you buy; it’s what you pay.”
Howard Marks was involved in investing around that time and admits losing money on great companies — simply because he overpaid. His key takeaways:
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Valuation matters. Even great companies can deliver poor returns if bought at high prices.
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Investor psychology drives risk. The more people agree a stock is "safe," the more dangerous it becomes — due to crowding and inflated valuations.
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No company is worth an infinite price. “Growth at any price” is dangerous.
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Mean reversion happens — both in performance and in valuation multiples.
Nifty Fifty Collapse: P/E Compression and Price Crash
P/E in 1972–73 | P/E in 1974–75 | Price Drop from Peak | |
|---|---|---|---|
| Polaroid | ~90x | ~20x | -91% |
| Avon Products | ~65x | ~15x | -86% |
| Xerox | ~45x | ~13x | -71% |
| McDonald's | ~75x | ~18x | -71% |
| Walt Disney | ~80x | ~15x | -68% |
| Coca-Cola | ~45x | ~12x | -68% |
| Johnson & Johnson | ~60x | ~14x | -60% |
| IBM | ~50x | ~12x | -55% |
| Merck | ~50x | ~13x | -56% |
| Philip Morris | ~30x | ~8x | -45% |
| Pfizer | ~55x | ~14x | -57% |
| PepsiCo | ~50x | ~12x | -50% |
| Gillette | ~55x | ~10x | -62% |
| Procter & Gamble | ~40x | ~11x | -58% |
| Colgate-Palmolive | ~45x | ~12x | -59% |
| Eli Lilly | ~60x | ~15x | -61% |
| Minnesota Mining (3M) | ~35x | ~9x | -50% |
🎯 Key Observations:
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The average P/E fell from ~50–60x to ~10–15x, a compression of 70–80% in valuation multiples.
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Stock prices collapsed not because earnings fell massively — but because the market stopped paying sky-high prices.
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Many of these stocks eventually recovered and became long-term wealth creators — but it took a decade or more to break even.
💡 Lessons We Can Apply Today:
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P/E expansion can fuel a bull market — but P/E contraction can erase it in a flash.
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Great companies are not immune to valuation risk.
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If you buy at 60x earnings, even 20% growth for 5 years might not save you from multiple compression.
The interest rate environment played a huge role in the Nifty Fifty collapse, and it's a key part of the puzzle. Here's the backdrop:
📆 US Interest Rates (1970–1975)
| Year | Fed Funds Rate (approx.) | Notes |
|---|---|---|
| 1970 | ~7.75% | High inflation begins creeping in |
| 1971 | ~4.5% | Fed eases post-recession (Nixon shock, end of Bretton Woods) |
| 1972 | ~5.25% | Easy money continues; asset bubbles inflate |
| 1973 | ~10.75% | Inflation surges (OPEC oil embargo), Fed tightens rapidly |
| 1974 | ~13.0% | Interest rates peak amid stagflation |
| 1975 | ~5.25% | Fed cuts rates to fight deep recession |
📉 Why This Matters for Nifty Fifty Valuations:
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In 1971–72, falling interest rates made investors hungry for long-duration, high-quality stocks (similar to recent years). They were willing to pay 50–90x P/E for "never-fail" growth names.
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In 1973–74, as rates surged above 10%, those same stocks saw P/E multiples collapse. With bonds yielding 10–13%, investors demanded much higher equity risk premiums.
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The crash wasn't caused by earnings collapse — it was driven by macro tightening and inflation fears. Sound familiar?
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