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Investing lessons from the 1970s

Higher interest rates, inflation and overvalued equities—today’s investing landscape looks a lot like it did 50 years ago. Patient Capital’s Vito Maida explores the implications.

The investing landscape of the early 1970s bears an uncanny resemblance to today’s. In 1972, investors were bullish on the “Nifty Fifty” large-cap stocks that dominated the New York Stock Exchange and were considered surefire buy-and-hold growth stocks—a misplaced faith that offers investing lessons for today.

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“Those 50 stocks commanded market respect and were seen as ‘one-decision’ investments, much like the fascination with today’s Magnificent Seven,” says Vito Maida, president and portfolio manager at value investor Patient Capital Management Inc. (“Patient Capital”).  “The Nifty Fifty included companies such as IBM, Coca-Cola, Procter & Gamble and Xerox. These market-dominant corporations demonstrated consistent revenue and earnings growth, and investors were willing to pay high price-to-earnings (P/E) ratios for them—exorbitant valuations as high as 80 to 100 times earnings.”

Maida compares those valuations to today’s Magnificent Seven companies: Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla. He sees each of these stocks as trading significantly above their value.

What happened to the share prices of the Nifty Fifty facing the headwinds of economic chaos offers a cautionary tale for investors who assume endless growth for Magnificent Seven companies.

In the early 1970s, as recession, stagflation, rising interest rates, soaring energy prices and geopolitical pressure plagued the U.S. economy, the value of Nifty Fifty stocks soon succumbed to gravity. A bear market began with the 1973-74 stock market crash and lasted until 1982, and these stocks lost a substantial portion of their value.

In his book Stocks for the Long Run, economist Jeremy Siegel notes that with few exceptions, Nifty Fifty-era stocks that routinely sold for P/E ratios above 50 performed worse over the next 25 years than the broader market as measured by the S&P 500. While some Nifty Fifty companies, including American Express, Johnson & Johnson and Dow Chemical, remain robust 50 years later, others haven’t fared as well. Companies such as Schering-Plough Corp., Polaroid and Heublein Inc. ceased to exist, while others have lost market dominance.

There is little doubt in our minds that equity returns are likely to be very low over the next 10 years

Vito Maida

Current equity markets continue to perform strongly, driven by investor sentiment Maida attributes to optimism over Magnificent Seven stock performance.

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 “With Magnificent Seven companies seen as ‘can’t miss’ investments at any price, optimism has infected the overall markets, with general valuations near all-time highs,” Maida says. “We believe today’s investment landscape is comparable to that of 1972, with the potential for the same decade-long results.”

He notes that current concerns about the economy, including stagflation, high government debt, higher interest rates, rising energy prices and geopolitical tension, don’t support a continuation of those high valuations.

“If these forces persist, there is little doubt in our minds that equity returns are likely to be very low over the next 10 years, mirroring the 1970s investor experience,” he says.  “We strongly believe that most, if not all, the companies comprising the Magnificent Seven will experience substantial declines from today’s levels at some point. They are also highly likely to underperform the broader market indices over the long term, and some investors will suffer a permanent loss of capital.”

Maida says Patient Capital puts an emphasis on value and quality

As a disciplined value investor, Patient Capital has zero exposure to the Magnificent Seven. Its client portfolios are typically represented by no more than 20 high-quality businesses demonstrating long operating histories, with stocks generally purchased when trading at a 40 to 50 per cent discount from intrinsic value. These equities are sold when they reach fair value. Patient Capital would rather hold cash than invest or remain invested in overvalued companies.

“We’re always ready to deploy that cash if we find investing opportunities that meet our criteria for value and quality,” Maida says.

He adds that the value investing strategies that outperformed both equity indices and growth investing strategies during the chaotic 1972-1981 period can do so again.

“The echoes of the Nifty Fifty serve as a reminder of the importance of prudent investment practices,” Maida says. “We’re confident that a strategy based on value and quality will continue to outperform over the long run.”

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Lysander Funds offers Lysander-Patient Capital Equity Fund (Series A and Series F), for which Patient Capital is the portfolio manager.

For more information on Patient Capital, visit: https://patientcapital.com.

For more information on Lysander Funds, visit: www.lysanderfunds.com.

This story was created by Canadian Family Offices’ commercial content division on behalf of Lysander Funds Limited, which is a member and content provider of this publication.

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