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Lessons from the 'Nifty Fifty' in the 1970s could be applied to the FANG trade today

What Cisco can teach growth investors
What Cisco can teach growth investors

Brutal sell-offs have taken down some of Wall Street's most highly prized stocks.

The FAANG stocks — Facebook, Apple, Amazon, Netflix and Google parent Alphabet – which had driven the markets to records earlier this year have plummeted in the past three months with four-fifths in bear market territory.

Michael Batnick, director of research at Ritholtz Wealth Management, said history could provide some valuable lessons for how to navigate the next wave of selling.

"We have these five stocks, the FAANG stocks, and we think about the narrow leadership there and we compare them to the 'Nifty Fifty' of the early '70s or the dot-com stocks of the late '90s," Batnick told CNBC's "Trading Nation" on Tuesday.

The "Nifty Fifty" was a group of large-cap stocks, such as McDonald's, Disney and Polaroid, prized in the early '70s for their high growth. However, their elevated valuations made them vulnerable to sharp sell-offs and underperformance through the 1980s.

"Obviously what you pay does matter," Batnick said, using Cisco's run during the dot-com bubble top as an example. "Cisco, which topped in March of 2000, that was trading at over 200 times earnings. ... Over the next 18 years, the business earned $115 billion but all those gains were pulled back into the stock price."

Cisco remains 43 percent below its March 2000 record.

However, some high-growth, overvalued stocks might be worth it in the long run, Batnick said.

"The biggest winners always look expensive," he said. "In the early '70s you had McDonald's trading at 85 times earnings and yes like everything else, it got hit, it declined 70 percent to the lows, but it's up 1,200 percent from the early '70s to today."

"So, you have to be careful what you pay obviously but then also at the same time the biggest winners, the names where people say 'if I put $10,000 into the stock' they get destroyed on the way to that big growth," Batnick added.

Apple, Amazon, Netflix and Alphabet are still higher for the year, though Facebook is 23 percent lower.

Top market lessons from the highest-valued companies 50 years ago
Top market lessons from the highest-valued companies 50 years ago