Greg Wilson

From Greg Wilson, chief analyst, the Legacy Portfolio: The Nifty Fifty were the top 50 large-cap stocks on the New York Stock Exchange (NYSE) in the 1960s and 1970s. Xerox, IBM, Polaroid, and Coca-Cola were among those featured on the list.

The companies were known for their proven track records and continual dividend increases. They were known as “one-decision stocks.” You bought them and never sold them… just like the companies in our Legacy Portfolio.

But let’s assume we bought the Nifty Fifty at the worst possible time… the December 1972 market peak. Nifty Fifty stocks were popular. Folks were impressed with the consistent results. Institutions loaded up.

The chart below shows what happened next…

The Dangers of Short-Term Thinking

The Nifty Fifty fell 45% over two years.

But that’s just the short-term outcome. Remember, as Legacy investors, we think long term.

Unlike our other PBRG portfolios, we don’t apply trailing stop losses to our positions. That may seem high risk at first… but the Legacy strategy relies on the proven strength of these businesses to counteract short-term weakness, as you’ll see below.

  In 1998, Wharton Business School professor Jeremy Siegel measured the performance of an equally weighted Nifty Fifty portfolio from the December 1972 high. But he extended the sample period through August 1998, a span of almost 26 years.

Over that time, the portfolio returned 12.2% annually (just shy of the S&P 500’s 12.7%).

An annual return of 12.2% turns $10,000 into about $100,000 after 20 years. That’s a lot better than losing half your portfolio’s value.

So, how was the Nifty Fifty portfolio able to do that well over the 20-year period?

The portfolio was comprised of Legacy-like companies. These were companies known for their proven track records and continual dividend increases.

And while there were a handful of stocks that went nowhere for 25 years, the winners more than compensated for the losers.

In fact, the winners included some of the same stocks we own in the Legacy Portfolio today.

Bottom line: Even if you buy Legacy companies at the worst possible time, the inherent strength of these companies will insulate you from poor timing. You’ll still make respectable returns that beat the S&P 500’s historical average of about 10% per year. And you might outperform even further on the backs of the most powerful businesses in the world…

Reeves’ Note: Current Legacy Portfolio subscribers can access the October Legacy update, right here.