The Nifty Fifty

The Nifty Fifty was a group of roughly fifty blue-chip American growth stocks, names like Coca-Cola, IBM, and Polaroid, that in the early 1970s traded at price-to-earnings multiples of 50 to 90 times. The idea was that they were such good businesses you should own them at any price. When that idea broke, those multiples fell by half or more over the following few years.

The businesses weren't the problem. Most of the Nifty Fifty companies kept growing earnings for decades afterward. The problem was entirely in the second number: what investors were willing to pay for each dollar of those earnings. Paying 80 times earnings for a good company means you need decades of flawless growth just to earn a normal return, and it leaves you nothing for the ordinary bumps every business hits along the way.

what actually compressed

This is a multiple story, not a business-quality story. A price-to-earnings multiple of 80 prices in none of the disappointment that eventually shows up somewhere. When growth merely slowed, rather than stopped, that alone was enough to send the multiple back toward 20 or 15, and a stock can lose 70 percent of its value on that move even while the underlying company's earnings are still going up.

"one-decision" stocks

The Nifty Fifty were sometimes called "one-decision" stocks: buy them once and never think about the price again, because they were simply too good to sell. That phrase was the whole mistake. Price doesn't stop mattering just because the company is good.

• A business can keep growing earnings for years and the stock can still fall, if the multiple paid for those earnings was too high to begin with.
• A P/E of 50 to 90 prices in decades of exceptional growth with almost no room for disappointment.
• The correction here was a multiple compressing back toward normal, not a business breaking.