Principle #4 - Price Determines your Return
When a stock is bought at 50% to 75% below its Private Market Value, even if the stock takes 5 years to double in price, it will provide a 15% return. Should it take 6 years to double, the return will be 12%.
At the bottom of the 1974 bear market, there was a group of stocks that were the "star performers" of their time. They were referred to as the "Nifty 50" (see the chart below).
1972 to 1974 Nifty Fifty
| Company | 1972/73 HighPrice | 1974/75 LowPrice | % of Stock Decline | Years to Break 1972 High | Time Line |
| American Express | 17.3 | 4.8 | -72.3% | 10 | 1972-1982 |
| American Home Products | 6.0 | 3.3 | -45.8% | 10 | 1972-1982 |
| AMP | 8.6 | 3.4 | -60.5% | 8 | 1972-1980 |
| Anheuser-Busch | 67.8 | 21.0 | -69.0% | 10 | *1972-1982* |
| Avon Products | 70.0 | 9.5 | -86.4% | 25 | 1972-1997 |
| Baxter Labs | 15.3 | 6.0 | -60.7% | 9 | 1972-1981 |
| Black & Decker | 43.0 | 20.0 | -53.5% | 24 | 1972-1996 |
| Burroughs (Unisys) | 42.0 | 20.3 | -51.8% | 15 | 1972-1987 |
| Coca-Cola | 3.2 | 0.9 | -72.4% | 13 | 1972-1985 |
| Disney | 6.8 | 1.0 | -85.3% | 13 | 1972-1985 |
| DuPont | 11.5 | 4.8 | -58.7% | 14 | 1972-1986 |
| Eastman Kodak | 67.0 | 26.0 | -61.2% | 15 | 1972-1987 |
| General Electric | 4.9 | 2.0 | -59.2% | 10 | 1972-1982 |
| Gillette | 4.1 | 1.3 | -68.3% | 12 | 1973-1985 |
| Honeywell | 21.5 | 2.2 | -89.9% | 15 | 1972-1987 |
| IBM | 91.3 | 37.6 | -58.8% | 10 | *1972-1982* |
| Intl Flavor & Fragrances | 16.1 | 6.5 | -59.6% | 15 | 1972-1987 |
| ITT | 64.5 | 12.0 | -81.4% | 15 | 1972-1987 |
| Johnson & Johnson | 5.5 | 3.0 | -45.5% | 10 | 1972-1982 |
| Kimberly-Clark | 3.3 | 1.1 | -66.7% | 8 | 1973-1981 |
| K-Mart | 17.0 | 6.3 | -63.2% | 14 | 1972-1986 |
| Eli Lilly | 5.8 | 3.3 | -42.6% | 13 | 1972-1985 |
| McDonald's | 77.0 | 21.5 | -72.0% | 10 | 1974-1982 |
| Merck | 5.5 | 2.6 | -52.7% | 13 | 1972-1985 |
| Minnesota Mining (3M) | 22.0 | 11.0 | -50.0% | 14 | 1972-1986 |
| Pfizer | 3.3 | 1.4 | -57.6% | 8 | 1972-1980 |
| Philip Morris | 34.2 | 17.1 | -50.0% | 5 | *1973-1978* |
| Polaroid | 75.0 | 7.3 | -90.3% | 0 | Never |
| Procter & Gamble | 7.5 | 4.3 | -42.7% | 11 | 1972-1983 |
| Quaker State | 36.0 | 11.0 | -69.4% | 0 | Never |
| Rubbermaid | 50.0 | 10.0 | -80.0% | 9 | 1973-1982 |
| Sears | 61.0 | 21.3 | -65.2% | 25 | 1972-1997 |
| Schering-Plough | 5.5 | 2.8 | -50.0% | 14 | 1972-1986 |
| Texas Instruments | 138.9 | 58.8 | -57.7% | 10 | *1972-1982* |
| Wachovia Bank | 45.6 | 10.1 | -77.9% | 11 | 1972-1983 |
| Xerox | 57.0 | 15.3 | -73.2% | 24 | 1972-1996 |
| Average decline from peak | -65.8% | |
| Average years to break 1972 high | 12 years | |
*1984 Value Line is the
source of the high and low prices (not adjusted for splits after 1982). The
remaining high and low prices were derived from the visual references stated
in the SRC Green Book of 5-Trend 35-Year Charts from 1963-1998.
The accuracy of these numbers is primarily dependent upon the accuracy of the
referenced charts as they were used for visual references.
During the market decline from its peak in 1972 / 1973 to the bottom in 1974, these popular stocks, on average, dropped 65.8% and took 12 years to recover!
In 1999, we saw a similar bubble in the high tech stocks as prices went to levels that were 100 to 400 times greater than what the stocks were worth. For a comparative study, we created our own version of a modern day Nifty 50. This new Nifty 50 group represents the "New Economy" stocks and widely held companies during the period 1999 through the year 2000. These high profile companies were the focus of investors, mutual funds and the media alike (see the chart below).
|
New
Economy Nifty-Fifty Widely Held Stocks
|
||||
| Company | High Price | Low Price | Decline FromPeak to Low | Percent Increase Needed To Return To High |
| (1) | (2) | |||
| A T & T | 61.0 | 12.4 | -79.7% | 391.9% |
| Amazon.Com | 113.0 | 5.5 | -95.1% | 1950.8% |
| America Online | 95.8 | 27.4 | -71.4% | 249.7% |
| Applied Materials | 115.0 | 27.1 | -76.5% | 325.1% |
| Ariba | 183.3 | 1.4 | -99.2% | 12811.5% |
| BMC Software Inc. | 86.6 | 11.5 | -86.7% | 653.3% |
| Charles Schwab | 44.8 | 8.1 | -81.8% | 450.4% |
| Ciena | 151.0 | 9.4 | -93.8% | 1504.7% |
| Cisco Systems | 82.0 | 11.0 | -86.5% | 642.8% |
| Compaq Computer | 35.0 | 7.3 | -79.3% | 382.1% |
| Corning | 113.3 | 8.2 | -92.7% | 1277.1% |
| Dell Computer | 59.7 | 16.0 | -73.2% | 272.8% |
| Ebay | 127.5 | 26.8 | -79.0% | 376.6% |
| EMC Corp | 103.3 | 10.0 | -90.3% | 931.5% |
| Enron | 90.8 | 24.5 | -73.0% | 271.0% |
| Ericsson | 26.3 | 3.2 | -88.0% | 730.0% |
| Flextronics | 44.3 | 12.4 | -72.1% | 258.0% |
| General Electric | 60.5 | 28.5 | -52.9% | 112.3% |
| Global Crossing | 61.8 | 1.6 | -97.4% | 3739.3% |
| Hewlett Packard | 68.1 | 12.5 | -81.6% | 444.8% |
| Home Depot | 70.0 | 30.3 | -56.7% | 131.0% |
| IBM | 134.9 | 80.1 | -40.7% | 68.5% |
| Intel Corp. | 75.8 | 19.0 | -75.0% | 299.9% |
| JDS Uniphase | 153.4 | 5.1 | -96.7% | 2896.5% |
| Lucent Technologies | 79.6 | 5.0 | -93.7% | 1478.9% |
| Microsoft | 119.9 | 40.3 | -66.4% | 198.0% |
| Motorola | 61.5 | 10.5 | -82.9% | 486.1% |
| Nextel | 82.9 | 7.1 | -91.5% | 1073.1% |
| Nokia | 62.5 | 15.3 | -75.6% | 309.8% |
| Nortel Networks | 89.0 | 4.8 | -94.7% | 1769.7% |
| Oracle | 46.3 | 10.2 | -78.1% | 355.8% |
| Pfizer | 49.3 | 34.0 | -31.0% | 44.9% |
| Qualcom | 200.0 | 42.6 | -78.7% | 369.5% |
| SBC Communications | 59.0 | 38.2 | -35.3% | 54.5% |
| Solectron | 52.6 | 9.9 | -81.2% | 431.0% |
| Sun Microsystems | 129.9 | 26.0 | -80.0% | 399.8% |
| Texas Instruments | 99.8 | 20.1 | -79.9% | 396.4% |
| Verisign | 258.5 | 26.3 | -89.8% | 884.8% |
| Vignette | 100.7 | 3.1 | -96.9% | 3168.4% |
| Vodaphone PLC | 64.4 | 18.0 | -72.1% | 258.2% |
| Wal-Mart | 70.3 | 41.4 | -41.0% | 69.5% |
| WorldCom, Inc | 59.8 | 11.5 | -80.8% | 419.9% |
| Xilinx | 98.3 | 19.5 | -80.1% | 403.7% |
| Yahoo | 250.1 | 8.0 | -96.8% | 3018.0% |
| Average Decline | -78.3% | 1062.8% | ||
| Median Decline | -80.1% | |||
| Source
of Prices: Bloomberg (1) High Price: Highest Price 1999/2000 (2) Low Price: Lowest Price September, 2000 Prices rounded to the nearest tenth |
Note that it will take 12 years at 15% to break even from the above loss. | |||
From the peak prices to the lows of September, 2001, these stocks declined on average -78.3%.
As an equally weighted group, they need a return of 1,062% in order to get back to their peak prices. Just as we saw with the 1974 Nifty Fifty, it will take this "New Economy Nifty Fifty" 12 years of 15% returns just to return to their peak prices!
You can see, by these two Nifty 50 examples, that a great company is not the most important criterion for investing - price is! Always remember, the price you pay for a company will ultimately determine your return.
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