The stock market exhibits cyclical patterns, and a historical parallel exists between the 1970s Nifty Fifty bubble and the current market dominance of the "Magnificent Seven" tech stocks, suggesting a potential for a similar, painful correction due to overvaluation and overconcentration.
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It's no secret that history repeats
itself. And when it comes to the stock
market, investors will do whatever
mental gymnastics they need to convince
themselves that this time it's
different. In fact, legendary investor
Sir John Templeton, who averaged 15%
annual growth for 38 years, called those
the four most expensive words in the
English language. And he's right because
nothing empties a brokerage account
faster than blind optimism dressed up as
financial genius. Which brings us to
Jesse Livermore. Jesse Livermore, who is
considered a pioneer of speculative
trading in the markets, was the basis
for the main character in the
best-selling book reminiscences of a
stock operator and is most wellknown for
making his fortunes by shorting markets
during crashes. Once said, "There's
nothing new in Wall Street. There can't
be because speculation is as old as the
hills. Whatever happens in the stock
market today has happened before and
will happen again. And there's a stock
market bubble that nobody talks about
anymore. It's a bubble that looks
disturbingly similar to the current
state of the market. I'm not talking
about the dot bubble of the early 2000s
or the 2008 financial crisis. I'm
talking about a bubble you probably have
never heard of. It was a bubble that
when it popped, the damage was ugly. The
market crashed 50%. Many of the world's
largest companies lost 60 to 80% of
their value. Inflation surged from 3 to
11%. And the market didn't fully recover
for 8 years. I'm talking about the
nifty50 bubble of the early 1970s. [Music]
[Music]
The story starts in the late 1960s. The
United States has just ridden a 20-year
economic sugar high following World War
II. Factories were booming. Suburbs were
popping up out of nowhere like acne on a
teenager. And Americans thought the
country was invincible. Because in the
late60s, people had money. They had
confidence. And most importantly, they
had blind optimism. And why wouldn't
they? The United States had just beaten
Germany in World War II, dropped a man
on the moon, allegedly, and most
importantly, invented the etch of
sketch. Life was good. And in the middle
of all this optimism was the stock
market. From the end of World War II in
1945 all the way to 1970, the United
States stock market had gained over 350%.
350%.
This unprecedented bull run led to a new
strategy in investing becoming
popularized. It was known as investing
in one decision stocks. The concept was
simple. Invest in companies so powerful
and so dominant that you only had one
decision to make when it came to
investing in them. Buy these stocks
became known as the Nifty50. The Nifty50
wasn't comprised of penny stocks or
emerging tech companies, but it was
comprised of blue chip companies that
generated stable cash flows. It was
companies like Coca-Cola, American
Express, McDonald's, and various other
household names. Investors saw these
companies as bulletproof. And because of
this, the idea of ever selling any of
these stocks was considered crazy. [Music]
[Music]
Here's the thing about investing. If
something sounds like a no-brainer
investment with zero downside, it's
almost always a financial grenade with
And that was exactly the case here. By
the early 1970s, the Nifty50 stocks
weren't just expensive. They were priced
like gravity didn't affect Wall Street.
The average PE ratio for the overall
market at the time was a humble 15.
respectable, normal, the kind of number
you could bring home to your parents.
But the never sell mentality around the
nifty50 turned their valuations into
numbers you only see in a fairy tale.
Coca-Cola was trading at 46 times
earnings, Xerox 49 times earnings,
McDonald's 86 times earnings, Polaroid
90 times earnings, and the list just
keeps going. On average, the Nifty50
stocks were trading at a jaw-dropping 42
times earnings. And it doesn't stop
there. At the peak, the top five Nifty50
stocks made up around a quarter of the
entire market. And collectively, the
entire Nifty50 group made up roughly 45%
of the total United States stock market. [Music]
[Music]
Then came 1973 to 1974. The dominoes
fell one by one and reality came in and
slapped everyone across the face. Oil
prices quadrupled. Inflation jumped to
over 11%. Unemployment doubled from 4
1/2% to 9%. And President Nixon
effectively ended the gold standard for
good. This led to the stock market
plunging 50% between 1973 and 1974,
which marked the worst bare market since
the Great Depression. And when the
economy falls apart, overpriced stocks
don't just correct, they get
obliterated. In the Nifty50, Coca-Cola
shares fell over 60%. McDonald's shares
fell over 70%. And worst of all,
Polaroid shares collapsed more than 90%.
The so-called one decision stocks turned
into one big financial obituary. And
here's the real gut punch. The damage
wasn't quick. This wasn't a cute little
V-shaped recovery like we saw after the
pandemic. It took the market 8 years
until 1981 to crawl back to the same
level it had been at before the bubble
popped. This was the reality of the
Nifty50 collapse. Investors who thought
they were buying eternal growth stocks
ended up trapped in financial purgatory
for the better part of a decade. [Music]
[Music]
Now, if you're looking at the current
state of the market and getting a slight
sense of deja vu, you're not alone. In
fact, Mark Twain once said, "History
does not repeat itself." But it does
rhyme. And while not identical, today's
stock market undeniably rhymes with the
one back in 1972. And back in 1972, the
Nifty50 made up nearly 45% of the total
United States stock market. Meaning with
every dollar invested into a stock
market index fund, investors were making
a bet that these nifty50 companies would
somehow grow into these ridiculous price
tags slapped on them. And if you fast
forward to today, the movie has the same
plot, just with shinier special effects.
The United States tech giants, better
known as the Magnificent 7, now make up
around 36% of the entire S&P 500. That's
right, seven companies. Microsoft,
Apple, Google, Amazon, Meta, Tesla, and
Nvidia carry the weight of the entire
stock market. If that feels eerily
familiar to the level of concentration
we saw with the Nifty50 companies, it's
because it is. Yes, the Magnificent 7
companies are innovative, and yes, they
dominate their industries, but so did
Xerox. So did Polaroid, and so did Avon
products back in 1972. The Magnificent 7
have become the modern echo of the one
decision stocks that dominated back in
1972. When it comes to the Mag 7,
investors are acting as if there's only
one decision to make when it comes to
investing in them. So, what about the
valuations of these modern-day tech
giants? Surely, they're priced fairly,
right? Well, not at all. Let's just say
they're also priced like gravity doesn't
affect them. Google and Meta trade at 28
times earnings. Amazon 35 times
earnings, Apple 37 times earnings,
Microsoft trades at 38 times earnings,
Nvidia 50 times earnings, and Tesla 247
times earnings. Are these solid
companies? Absolutely. Are they
overpriced, overweighted, and woripped
as if they're bulletproof? Also, yes.
And just like in 1972, investors are
telling themselves the exact same
bedtime story. These companies are
untouchable and will grow forever. All
we're missing is a couple of
macroeconomic dominoes to fall and we're
right back where we were. Warren Buffett
summed it up best. What we learn from
history is that people don't learn from
history. So here we are once again
staring at a topheavy market, pretending
valuations don't matter and whispering
the four most expensive words in the
English language. This time it's different.
different. [Music]
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