Any Index Can Trash You

Peak growth stock repute got memorialized in Morgan Guaranty’s 1972 portfolio. Even Sears, Roebuck sold at 30 times earnings. Growth stocks sold at 2.7 times the S&P 500 Index.

Morgan Guaranty’s Largest Holdings

(Yearend 1972)

Premium

Company Price-Earnings Ratio Over Market Index

IBM 37.4 100%

Eastman Kodak 48.2 165%

Avon Products 65.1 253%

Sears, Roebuck 29.5 60%

Xerox 48.9 166%

Procter & Gamble 32.0 73%

Walt Disney 81.5 343%

Polaroid 90.7 393%

Schlumberger 57.2 211%

Succeeding market cycles witnessed declining relative prices for growthies until late nineties. Then, growth bottomed at parity with the S&P 500. Currently, we’re around 1.9 times.

Rate your personal investment performance against what the world has to offer, not just a bland stock market index like the S&P 500. For instance, my holdings of contemporary art acquired past 60 years exceed even venture capital successes. Mark Rothko and Jackson Pollock sold for a thousand bucks in the fifties.

Why marry a flabby index like the S&P 500? Twenty years ago, the only tech house weighting, some 6%, was found in Microsoft, Intel and IBM. The internet didn’t exist nor was e-commerce a sizable factor in retailing.

NASDAQ 100? Can you accept breathtaking volatility? Five big capitalization stocks – Apple, Microsoft, Amazon, Alphabet and Meta Platforms comprise nearly 50% of the NASDAQ and a quarter of the S&P 500. At least, historically speaking, this is super-concentration, never seen earlier in financial history.

Institutional investors now counter with pie-chart constructs of 60% equities, 40% fixed income paper. This can save clients from extreme underperformance but that’s all. Past years’ performance showed nothing to write home about.

NASDAQ’s Giant Sombrero

This chart on the NASDAQ composite index, before, during and after the 2000 tech bubble, was a giant sombrero. The index shot up over 200% from mid-1998 to 2000. Then it plummeted from 5,000 back down to 1,000 early in 2002. Mid-2020, from its low in the 2009 financial meltdown, NASDAQ 100 forged into new high ground at 9,500, now at 16,000. Helluva rollercoaster ride!

Today, when you look at the handful of trillion dollar plus properties like Apple, Microsoft, Alphabet, Amazon and even Meta Platforms, you wonder who can prevail next 5 years. Meta, old Facebook, sells at 6 times book value. I challenge any analyst to build a spreadsheet for Amazon or Meta Platforms. Last time I looked, Meta sold at 6 times book value.

In financial history, going back nearly 50 years is a humbling experience. Stocks like IBM, Eastman Kodak, Xerox, Sears, Roebuck and Polaroid sold at premiums ranging as high as 393% for Polaroid. Roid made me rich in the sixties. Then, Japanese camera makers did them in. Marry the S&P 500 Index for life? Beware! No price stability in the index, particularly for growth stocks.

Some 20 years ago, 5 largest capitalizations embraced General Electric, Microsoft, Exxon Mobil, Pfizer and Citigroup, some 14% of the index. General Electric, numero uno at $415 billion, some 4.1% of market valuation. No Tesla nor Facebook around as yet.

As for NASDAQ 100, today, 5 growthies, Apple, Microsoft, Amazon, Alphabet and Meta Platforms make up half its valuation and nearly 20% of the S&P 500 weighting. Welcome to the world of zip.

Going back 20 years, technology was half present S&P 500 weighting, around 25%. Microsoft stood then at 2.8% with Intel and IBM at 1.7%. The market was in love with General Electric. Then, venture capitalists got busy backing tech startups in the internet and e-commerce sectors.

Yes! Alphabet, Amazon and Facebook proved out as story stocks while Intel and IBM fell by the wayside. Never mentioned on the Street is that contemporary art prices dwarfed rates of return even on successful venture pics. You do the rate of return ciphering over 20 years on a Jeff Koons sculpture, a canvas of Basquiat or Warhol.

When I started collecting art in the 1950s, iconic work by Jackson Pollock, Mark Rothko and Andy Warhol went for a thousand bucks. A Basquiat painting this year sold at auction around $100 million. In 1983, I turned down a comparable piece offered to me by Mary Boone for $2,500. Nobody’s perfect.

Recently, I sat at dinner next to a Chinese technocrat with billions. This operator related how he only felt secure bidding for art at auction against his contemporaries. When pieces like Andy Warhol’s Nine Marilyns, painted in 1962, was offered up, he felt secure bidding against his friends, but feared negotiating with dealers directly. They’d take his pants down. In this fashion, outlandish prices for art are set by bunches of dumb bunnies arriving late in the game.

Early fifties, when I started collecting art, I bought pieces from my contemporaries who were as yet artists without galleries. The going rate for a canvas then was $300. Paid for your picks $25 a month over a year’s time. But, you did your homework, too, reading about and seeing dozens of shows, monthly. Then, walking up 6 flights of stairs to visit a painter’s studio was no big deal.

Today, you need a G5 jet to cover everything going on in the art world, but the financial world is coverable from your desk.