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Well, the Nifty50, uh, were considered the best and fastest growing companies in America. Um, until the 1960s, most investments were made in stable traditional companies, industrial companies, transportation, utilities, and railroads. Um, around the 60s, uh, investors started, uh, focusing on what was called, uh, growth investing and growth companies .
I remember being in my dad's apartment in 1963 and seeing the first brochure about growth stocks, and that's what the Nifty50 was considered to be . Uh, IBM, Xerox, Kodak, Polaroid, Merc, Lily, Avon, Coca-Cola, etc.– companies that were considered so good that nothing bad could happen, and so good that no price was too high.
And if you bought those stocks the day I showed up for work in September of '69, and if you held on to them with patience and discipline, in five years you would have lost about 90% of your money because the company that didn't succeed is so good that it can't have a negative development . And no company is so good that it can't be overvalued and made dangerous.
And so I learned a very valuable lesson from this. Um, because you know you can, and you can study these lessons from books as much as you want. Living through it is another lesson. And what I learned is that it's not what you buy that matters, it's what you pay for. And there is no asset so good that it cannot be overvalued and made dangerous.
And there are very few assets so bad that they cannot be bought at a certain price. Um, and so it changed my thinking and changed the thinking of the world at this time. Instead of saying these are good assets and these are bad, we move to saying that yes, it may be risky, but the promised or expected return more than makes up for the risk, so I'm going to do it.
And the whole industry today works on risk, return, and the right mindset , and without that we wouldn't have private venture capital, uh, and many other forms of investing. Right. So, Howard, do you see that essentially what we're going to be doing today is value investing, as opposed to growth investing?
Well, you know, uh, the Nifty50 were growth stocks, uh, that were selling at very high prices with little dividend yield and very high P/E ratios at the moment, but were highly valued because of all the rosy things that people saw in the future. So, this is called investing in growth. And value investing, essentially , means, uh, buying things for less than they're worth and then getting that value.
You are buying something for less than it is worth. It goes to what it's worth. You make up the difference and move on . Right. I mean, I mean, in 1974, when they fell so hard, I mean, a lot of these companies are still around. I assume that at that point you would be considering purchasing them. The problem is , yes, you're right, John, but the problem is, first of all , most people don't have any money left, because if all your money is in the Nifty50 and it loses, you would like to, but you like to lower the average price, but with what?
And then, the other thing was that people's confidence was eroded , and, you know, when you buy something for 100 because you like it, and the price drops to 10, it's hard to go back and buy more. Usually, you know, one of the main things you feel is you get super aggressive in a panic, right? But it's hard.
This is difficult . But you, I mean, if you think about your profitability, let's say, over a long period of time, how you respond during a crisis is probably one of the biggest factors in your long-term performance, right? Well, that's exactly right. First of all, I mean, that's a really good observation.
First, the worst thing you can do as an investor, and there are many ways to go wrong, and there are many things you can do wrong. But the worst thing, in my opinion, is buying something and seeing the price drop, selling it just because it dropped. Uh, you know, if you look at the market as a whole, say, you buy and it drops 30%.
This is fine if you are patient because most likely the next high will be higher than the previous high and the economy and market will benefit from the rising age trend line. Rightly. Yes. But that's right, buying high and then seeing it fall isn't the worst thing in the world because the next high is likely to be higher.
The worst thing in the world is to buy high and then see it fall and sell, because then you don't participate in the recovery. Right? So I...I describe this as a cardinal sin of investing. Or, if you can, if you can muster up the courage, buying at a low price is a very important way to make money, in my opinion, safely.
In the midst of the pandemic, Zoom became one of the most expensive stocks on the market. It was trading at a price that was well above 300 times the profit. And at some point in 2020, depending on the reporting period, its trailing P/E ratio exceeded 700 and even 2,000 times. But investors kept buying because they believed the company's explosive growth would last forever.
In 2021, Zoom's profits grew by an incredible 2,500%. Which seemed to justify optimism. But as the world returned to normal, growth slowed, valuations returned to reality, and stocks eventually fell more than 85% from their peak. A similar story happened with Tatexi . It was one of the market's biggest winners during the pandemic, rising nearly 15 times from the COVID lows to its peak in 2022.
At its peak, the stock was trading at around 110 times forward earnings. Between 2015 and 2023, the company's profits grew by about 30% annually, leading many investors to believe that such growth would continue indefinitely. Instead, profit growth slowed. With expectations lowered and valuations down, the stock has fallen nearly 66% from its peak.
So , what is the lesson from this ? As Warren Buffer once said, what the wise do in the beginning, the fools do in the end. Investors often convince themselves that a great company can do no wrong and that no price is too high. But history has repeatedly shown that no company is so great that it cannot face temporary setbacks, and no business is so exceptional that it cannot become overvalued.
Neither Zoom nor Tatalexi has experienced a single catastrophic event that would have destroyed the business. The key change was that profit growth normalized and valuation returned to a more reasonable level. When expectations are unrealistic, even a great company can become a bad investment. Have you ever owned a stock where the business remained strong, but the share price plummeted because the valuation was n't just too expensive? Share in the comments. I would like to hear your experiences.
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