Century
Management's
Four Principles of Successful Investing
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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