In a speech before the House of Commons, Winston Churchill paraphrased a phrase first said by Harvard professor George Santayana.   Churchill’s statement that, “Those who fail to learn from history are condemned to repeat it” became instantly famous because of its undeniable truth.  This is especially so in the investment business given its historical cyclical boom and bust periods.  Nonetheless people still like to think, “This time is different.”

The 1960s was a period of rising interest rates, social conscience and war.  At the time, the stock market couldn’t decide whether to go up or down.  So, it did both.  The Dow Jones Average went through cyclical bear and bull markets and going nowhere for 17 years.  It was especially true of the blue chips.  At the time, they were called “the generals” (General Motors, General Mills, and General Electric etc).   However, the concept of growth stocks - which had started in the mid 1950s - would continue through the late 1960s.  These stocks became known as “the Vestal Virgins.”  They were regarded with the same sanctity as the goddesses of ancient Rome.   Once bought – like the goddesses who had taken a 30 year vow of chastity – they were untouchable.  The price paid didn’t matter.

These Vestal Virgins numbered 50 and became known as the “Nifty Fifty.”  As a group, they were referred to as the “one decision” stocks.   Price paid was irrelevant because their seeming unending growth was so predictable.  The 50 stocks were bought, never to be sold.   It was a non-thinking concept.  In fact, it was the original premise of passive investing.  These one decision stocks could not be beaten by active managers – much as today - unless you owned all of them appropriately weighted in your portfolio.   Such was the buying momentum of true believers.  Much like the” Nifty 500”of today, you would have to weight them according to their appropriate weighting in the index.  Thus you would own more of the stocks that had gone up the most.   It was a situation that would cost dearly with a pullback in the market.  The premise worked wonderfully until the end of 1972.  Then in the bear market of 1973-1974, these over owned stocks were crushed.   The ones that had gone up the most went down the most ... over weighted.

Fifty years later, we have a “new” non-thinking concept called passive investing.  Again you can ignore the price of an individual stock.  And again, you can hold it forever.  However, this time it’s not based on excellence but accepting mediocrity.  Unlike the Nifty Fifty concept, its premise is based on matching the S&P 500.   It also evolved in a period of rising interest rates, social conscience and global conflict.  And like the Nifty Fifty experience before, it has outperformed all active managers.  However, we know how it will end because we have already seen this movie.  As Churchill said, “Those who fail to learn from history are condemned to repeat it.” Most likely, the S&P 500 will be relatively flattish for the next couple of years.   As correlation fades, individual stocks will as before outperform the broad market.   In reality, companies such as Salesforce.com and Macy’s Department Stores have nothing in common.   Why should their stocks trade together?  Mark Twain may have said it best with his comment, “History does not repeat itself, but it often rhymes.”

-Francis Patrick Boland