Before we begin class I would like to say that the statements made in this lecture are mine and only represent my personal opinions, they in no way are meant to represent any company or share of said companies as good or bad purchases, nor to make any attempt to insinuate that the individual companies aren’t good investments, instead they are to help shed light on how I attempt to use past performance and investor behavior to analyze and predict future market fluctuations. Also for complete transparency I need to say that while I am predominately an index fund investor, I do own shares of several companies that we will talk about in this lecture. These shares represent a small portion of my overall portfolio and are held in taxable accounts and a Roth ira. I took positions in these companies because I like analyzing them and reading their 10q and 10k reports, yes I’m a dork.
During the 1960’s and 1970’s the Nifty Fifty referred to 50 massively popular large cap stocks listed on the New York Stock Exchange. These companies were all regarded as buy and hold bets that were thought to be not only safe but almost certain bets, much in the same way that many young investors are beginning to view index funds. Many great and highly recognizable companies such as Anheuser-Busch, IBM, Johnson & Johnson, Black and Decker, Coca-Cola, Gillette, McDonalds, PepsiCo, Disney, Walmart, and Xerox were on the Nifty Fifty list. So in many ways buying into the “Nifty Fifty” was similar to buying an S&P index fund. Interestingly enough over a long period the best performer of the Nifty Fifty seems to be Walmart which had a return of 15,854% when last calculated about 5 years ago. If only we could go back in time and go all in on Walmart Stock, we would be very very well off.
In my opinion we can draw many similarities to today’s current market with the popularity of the FANG (Facebook, Amazon, Netflix, Google) Stocks. In fact those stocks coupled with Apple and Microsoft account for over 70% of the S&P 500’s recent gains and tech stocks as a whole account for almost a quarter of the S&P index, of course the silver lining is that unlike the dot.com bubble where almost anything with .com behind it had a huge valuation, today’s top tech companies are actual businesses that provide amazing products, are profitable, improve or simplify lives, and are highly innovative companies. So what does this all mean? Well looking back at the Nifty Fifty stocks that investors fell in love with during the bull market of the late 60″s and 70’s, where investor’s over confidence in the Nifty Fifty stocks that were supposed to be sure bets drove the share prices above sustainable levels and it was that speculation and overconfidence that subsequently led investors to continue to pour money into them even though their prices were becoming way over valued and eventually led to a major bear market where prices fell by almost 50% and lasted for several years. So in my opinion we can draw a correlation between the Nifty Fifty and the large cap index funds of today. So if we know that in 2017 and 2018 the S&P had the highest market valuation ever and that just a handful of companies are accounting for a very large portion of the valuation, coupled with massive over confidence of the average investor, historically low interest rates, and the longest running Bull market in history, then it is in my opinion that we need to begin to draw comparisons to the past and take steps to avoid similar results, or pick one and go all in, I’m kidding, please don’t do that. Now don’t get me wrong all the FANG stocks as well as Apple and Microsoft are all great companies with amazing business plans, strong balance sheets, loyal customers, and great products offered the world over. Each of these individual companies could continue to see increases in their share price as well as index investors could continue to see the market climb and climb. It is worth noting that it usually isn’t the businesses that cause the problem with the share prices, it’s actually the investors that get greedy and instead of investing based off of actual company earnings, they begin to speculate and believe/hope prices will just continue to rise, in the hopes that someone else will come along and be willing to pay them more for the share than they paid. We discussed in a recent article that Mrs. Fu and Myself have very different views on how to handle market fluctuations and I would recommend checking it out to gain insight into our opposing views. It is my opinion that even though we have a strong economy, low unemployment, and almost historically low interest rates that we should be amassing a large cash position to take advantage of the eventual market downturn. I mean just imagine a national clearance day sale, where all major companies were selling their goods for 20%-50% off!!! Well when the eventual bear market does take place that is essentially what will happen, except instead of consumer goods it will be shares of the actual companies that will be on clearance.
As you all know I am a part of the FIRE community and an index fund investor and believe that the best course of action is to minimize expenses as much as possible, increase income as much as possible, and save the difference to invest. I believe that over time index funds will offer not only the best long term return but do so with the least amount of stress and worry. I say this because of all the amazing companies in the Nifty Fifty, how could anyone have guessed that Walmart would offer the best returns? I mean I love Walmart and I’m always amazed at how Sam Walton was able to build such an amazing company that offers it’s customers items from all over the world at such low prices but you would have to be one lucky person to pick it over every other company. So this leads me to what in my opinion is the best course of action, I think that at least 20% of your current contributions to your retirement accounts should currently be going to a money market account to be held for the chance to take advantage of the average investors current overconfidence in today’s market. Let them buy HIGH and sell LOW.
Thank you for joining us and remember that we are not licensed financial advisers or tax professionals, please consult with your financial specialist before making any financial decisions.