Mastering The Market Cycle: Getting the Odds on Your Side

by Howard Marks

The idea of “growth stocks” began to be popularized in the early 1960s, based on the goal of participating in the rapidly growing profits of companies benefitting from advances in technology, marketing and management techniques. It gathered steam, and by 1968, when I had a summer job in the investment research department of First National City Bank (the predecessor of Citibank), the Nifty Fifty stocks—the fastest growing and best—had appreciated so much that the bank trust departments that did most of the investing in those days generally lost interest in all other stocks. Everyone wanted a piece of Xerox, IBM, Kodak, Polaroid, Merck, Lilly, Hewlett-Packard, Texas Instruments, Coca-Cola and Avon. These companies were considered to be so great that nothing bad could ever happen to them. And it was accepted dictum that it absolutely didn’t matter what price you paid. If it was a little too high, no matter: the companies’ fast-rising earnings would soon grow into it. The result was predictable. Whenever people are willing to invest regardless of price, they’re obviously doing so based on emotion and popularity rather than cold-blooded analysis. So Nifty Fifty stocks that had been selling at 80–90 times earnings in 1968, in the vanguard of a powerful bull market, came down to earth when ardor cooled. Thus many sold at 8–9 times earnings in the much weaker stock market of 1973, meaning investors in “America’s best companies” had lost 80–90% of their money. And note that several...