stock pickers,” as well as due diligence by the staff of Fortune. The ten stocks were as follows:
These ten stocks, which then had an aggregate market capitalization over $1 trillion, represented the cream of the ballyhooed New Economy. They were not the small-cap stocks which, we know, crowd-following momentum investors might be prone to bid up to unsustainable prices. For investors looking for the “next GE,” the Fortune 10 included some of the leading tech, media, and telecom stocks. They were the glory stocks of the fin-de-siecle bubble, and their high price/earnings ratios – only one under 50 – reflected the faddishness of the age. Fortune, swallowing the popular perceptions whole, said they were ten stocks to let you “retire when ready.”
What are the risks in assuming that market prices are rational? By year-end 2002, these ten stocks had declined on average by 80% from the July 2000 prices quoted in the article.19 That is, they had suffered a loss of $800 billion. Even after the market resurgence of 2003, the decline was still 50%. Investors who bought the list suffered what Graham called a permanent loss of capital, the sort that value investors obsessively try to avoid.20
None of the ten funds, which were managing in the year 2000 more than $20 billion in all, had laid a glove on the Fortune 10 stocks at any time during that year, with two interesting exceptions. Legg Mason Value owned Nokia, though the stock represented less than 2% of its portfolio when purchased in 1996. Since the stock was sold in in mid-2000 at a gain of 1900%, it’s hard to be too critical. And Mutual Beacon had short positions in Viacom and Nortel, as part of arbitrages, meaning that they had bet against the stocks. That’s it. Didn’t every fund own Enron back then? Sure. But not these guys.