Becoming Berkshire: 1972 Part 2 -The Nifty Fifty

Issue 22 | Nifty Fifty, Nixon, Lakers, Presidential Election, Berkshire Hathaway 1972 Annual Letter

Mar 25, 2025

Welcome back to Becoming Berkshire! Join us as we dive into the fascinating history of the Buffett era at Berkshire Hathaway, exploring the stories and milestones that have shaped this incredible Company.

ICYMI:

Becoming Berkshire: 1972 - See's Candies

The Weekend Investor

Feb 21

Becoming Berkshire: 1972 - See's Candies

It has been said that the elixir of life is a combination of Cherry Coke and Peanut Brittle. This has undoubtedly added to the longevity of Warren Buffett and Charlie Munger. Additionally, See's Candies has played a pivotal role in Berkshire, as the acquisition of See’s was seen as a watershed moment in Berkshire's rich history.

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1972 was one of economic optimism, historic political shifts, and cultural milestones.

The U.S. economy expanded steadily, with GDP growing by over 5% and unemployment remaining at 5.6%. While inflation was moderate at 3.3%, it was beginning to rise, prompting President Nixon to maintain wage and price controls to combat increasing costs.

On Wall Street, the stock market thrived, with the S&P 500 climbing 15% and the Dow Jones reaching a record high of 1,036. Investors flocked to the "Nifty Fifty" stocks, believing these blue-chip companies—like IBM, Coca-Cola, and McDonald's—were safe "bets." However, signs of trouble were surfacing. The U.S. abandoned the gold standard in 1971, and by 1972, the effects of this shift were evident as the dollar fluctuated and economic uncertainties loomed beneath the surface. The market's euphoria would soon be tested by the inflationary pressures and economic turmoil that lay ahead.

President Nixon's visit to China marked a historic turning point in Cold War diplomacy.

Nixon won the presidential election by a landslide over George McGovern, securing 60.7% of the popular vote and 520 electoral votes as Nixon ran on his record of re-opening China, detente with Russia, de-escalating Vietnam, and a booming economy.

Rapport De Rome 1972 Presidential Election

At the same time, the Watergate scandal began with a break-in at the Democratic National Committee headquarters and marked the beginning of the end of the Nixon presidency. The world was also shaken by the tragedy at the Munich Olympics, where a terrorist attack resulted in the deaths of 11 Israeli athletes, highlighting rising global tensions.

The Miami Dolphins solidified their legacy in sports by completing the only perfect season in NFL history; the Los Angeles Lakers won their first championship in LA.

May 7, 1972 -The Los Angeles Lakers defeated the New York Knicks 4-1 in the NBA Finals ...

Meanwhile, Francis Ford Coppola's masterpiece, "The Godfather," redefined cinema by blending Shakespearean tragedy with organized crime, captivating audiences worldwide. Apollo 17 was the last mission in which a human landed on the moon.

Nifty Fifties

Introducing The New Nifty 50 Stocks: Already Up 71% This Year | Seeking Alpha

In the 1970s, Wall Street's pros vowed to return to sound principles. Concepts were out, and blue-chip companies were in. They would never come crashing down like the speculative favorites of the 1960s. Nothing could be more prudent than to buy their shares and then relax on the golf course. 1

There were only four dozen or so of the premier growth stocks. Their names were familiar - IBM, Xerox, Avon Products, Kodak, McDonald's, Polaroid, and Disney- they were called the Nifty Fifty. They were "big capitalization" stocks, meaning an institution could buy a good position without disturbing the market. And because most pros realized that picking the exact correct time to buy is difficult, if not impossible, these stocks seemed to make a great deal of sense. So, what if you paid a price that was temporarily too high? These stocks were proven growers, and sooner or later, the price would be justified. In addition, these were stocks that - like family heirlooms- you would never sell. Hence, they also called "one decision" stocks. You made a decision to buy them once, and your portfolio management problems were over.2

These stocks provided security investments for institutional investors in another way, too. They were respectable. Your colleagues could never question your decision to invest in IBM. True, IBM could go down, but that was considered a sign of imprudence."3

In his article Valuing Growth Stocks: Revisiting the Nifty Fifty, Jeremy Siegel explains that “popular delusions and the madness of crowds” is what held up the Nifty Fifty.

He writes “the average price-earnings ratio of these stocks was 41.9 in 1972, more than double that of the S&P 500 index’s 18.9, while their 1.1% dividend yield was less than half that of other large stocks. Over one-fifth of these firms reported price-earnings ratios of over 50, and Polaroid was selling at over 90 times its earnings.” 4

In the end, the speculative fervor concluded like any other mania, with the same investors eagerly buying the stocks, then deciding to sell them all at once.

I would be remiss not to point out that Jeremy Siegel argued that many companies in the Nifty Fifties became market-beating investments over time, despite being heavily overvalued in 1972. However, the drawdown lasted several years and must have undoubtedly been painful. I’m encouraged to read about the Nifty Fifty whenever I feel the urge to purchase a few shares of Costco at 50 times P/E.

1972 Annual Report

I have summarized the letter below; however, my fellow writer

WorldlyInvest

has done an excellent job breaking down the report.

WorldlyInvest

Lessons from Berkshire Hathaway’s 1972 Letter

7 months ago · 6 likes · WorldlyInvest

1972 proved fruitful for Buffett as “operating earnings of Berkshire Hathaway … amounted to a highly satisfactory 19.8% of beginning shareholders’ equity. Significant improvement was recorded in all … major lines of business.” 5

Since May 1965, when Buffett took over Berkshire, he has managed to reduce shares outstanding by 14% and compounded book value annually at 16.5% from $19.46 to $69.72.

“Our three major acquisitions of recent years have all worked out exceptionally well—from both the financial and human standpoints. In all three cases, the founders were major sellers and received significant proceeds in cash—and, in all three cases, the same individuals, Jack Ringwalt, Gene Abegg, and Vic Raab, have continued to run the businesses with undiminished energy and imagination, which have resulted in further improvement of the fine records previously established.” 6

Textile Operations

Berkshire Hathaway's textile division improved its performance in 1972 thanks to industry recovery and internal improvements in sales, manufacturing, and inventory management.

Insurance

The insurance underwriting business experienced profit gains during 1972, primarily driven by an "unusual convergence of favorable factors" such as diminishing auto accident frequency, moderating accident severity, and an absence of major catastrophes. Adam Mead calculated the combined ratio to be 93.7%

The "home state" operation, Cornhusker Casualty Company in Nebraska, achieved good underwriting results and demonstrated the appeal of its marketing approach. Smaller operations in Minnesota and Texas had unsatisfactory loss ratios. The acquisition of Home and Automobile Insurance Company of Chicago continued to prove successful, and plans were in place to expand into the Florida and California markets.

Banking

The Illinois Bank and Trust Co. of Rockford after-tax earnings of 2.2% on average deposits in 1972 were remarkable considering their mix of high-interest consumer time deposits, strong liquid position, avoidance of money-market borrowings, and a conservative loan policy resulting in a very low net charge-off ratio.

Overall, 1972 was a highly successful year for Berkshire Hathaway. The letter highlights the success of recent diversification efforts, establishing a significantly higher base of normal earning power compared to solely relying on the textile business. Since 1964, with no additional equity capital introduced, the book value per share has increased substantially.

The company's major acquisitions have worked out exceptionally well, with the original founders continuing to drive their businesses forward. While anticipating a modest decrease in operating earnings for 1973, Berkshire Hathaway remains focused on seeking logical extensions of their current operations and new opportunities to effectively employ their capital. The company also demonstrated a commitment to maintaining strong capital in its banking and insurance subsidiaries, prioritizing fiduciary responsibilities while still achieving good profitability.