StockWatch
Amazon and the Nifty Fifty
Amazon.com might be partying like it’s 1999, but is any other company even at the party?
In other words, is this Internet retailer’s good fortune something to generalize about? Or, is it nothing more than the exception that proves the rule?
Commentators have long found irresistible the drawing of profound investment lessons from what’s happening to Amazon.com, Inc. It was the poster child of the Internet boom in the late 1990s, rising to vertigo-inducing heights before becoming one of the biggest casualties when the Internet bubble popped.
After its fall from grace, in fact, it became a different kind of poster child: An illustration of the excesses of that earlier era.
But, here we are nearly a decade later and Amazon.com’s stock is trading at a new all-time high.
The overall stock market, in contrast, at least as judged by the Wilshire 5000 Total Market Index, is, of course, still well below its all-time high.
It would be easy to dismiss Amazon.com’s good fortune as entirely idiosyncratic, of course. Other high-flying darlings of the Internet boom are still well below their all-time highs, after all. Cisco Systems, Inc., for example, which at one point before the Internet bubble burst had the largest market cap of any publicly traded U.S. stock, is trading for only a third of its all-time high.
Still, a careful reading of history suggests that we might not want to be too quick to dismiss Amazon.com’s recent strength.
That history is courtesy of Jeremy Siegel, the well-known finance professor at the Wharton School of the University of Pennsylvania and author of the investment classic Stocks for the Long Run. Specifically, Siegel looked at the long-run performance of the group of stocks that, prior to the Internet bubble, perhaps most exemplified what many considered to be irrational exuberance. He found that, eventually and on average, they were worth their sky-high prices.
I’m referring to the so-called Nifty Fifty stocks from the early 1970s. These immensely popular stocks from that era sported huge P / E ratios, and -- like Internet stocks earlier this decade -- were huge casualties of the 1973 - 1974 bear market.
But, Siegel found, a portfolio that bought all 50 stocks at the stock market’s peak in December 1972, and held them for at least two decades, would eventually have taken the lead over the broad stock market.
To be sure, not all brokerage firms’ Nifty Fifty lists from that era contained the same 50 stocks. But, it’s worth noting that the specific list that Siegel worked with did not include Wal-Mart Stores, Inc., whose gargantuan percentage gain since then (north of 10,000 percent) would skew the results particularly strongly in favor of the long-run performance of the Nifty Fifty.
A couple of warnings, however, if one is tempted to draw an analogy between the Nifty Fifty of the early 1970s and the Internet stocks of the late 1990s and, in particular, to Amazon.com. One is that diversifying among many different stocks is key because not all Nifty Fifty stocks were success stories.
Furthermore, the virtues of diversification are even more important when dealing with Internet stocks than they were for the Nifty Fifty because Internet stocks tend to be fairly heavily concentrated in a few industries.
The other crucial investment lesson to draw is the need to hold for the long term -- what some refer to as time diversification. It took many years for the Nifty Fifty stocks to eventually justify their high prices from the early 1970s. And, even if the highest flying stocks from the late 1990s eventually do so as well, it’s a good bet that it will take many years for that happy outcome to come to pass.
If it does, and keeping in mind the two different kinds of diversification, Amazon.com’s new record high is a harbinger of good things to come many years down the road for those beleaguered investors who are still nursing the wounds they suffered earlier this decade from the bursting of the Internet bubble.Mark can be contacted via email at mhulbert@marketwatch.com.
