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SummaryChapter3ACenturyofStockMarketHistory:

TheLevelofStockPricesinEarly1972
NotesonTheIntelligentInvestorbyBenjaminGraham
NotesbyJasonFernando
CreatedNovember18th2013
LastupdatedNovember18th2013
Referencedocument:Graham,Benjamin,andJasonZweig.TheIntelligentInvestor.Rev.ed.New
York:HarperBusinessEssentials,2003.

Itisessentialfortheinvestortohaveanadequateideaofstockmarkethistory,intermsparticularlyof
themajorfluctuationsinpricelevelandofthevaryingrelationshipsbetweenstockpricesasawholeand
theirearningsanddividends.Withthisbackgroundhemaybeinapositiontoformsomeworthwhile
judgmentoftheattractivenessordangersofthelevelofthemarketasitpresentsitselfatdifferent
times.
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Thischapterconcernstherelationshipbetweenstockprices,earnings,anddividendsasithas
presenteditselfover(atthetimeofGrahamswriting,i.e.between1871and1972)thepast100years.

FurtherStudy:[Onpage69,Grahammentionsachartofdividenddatacorrespondingtothis100
yearperiod.Itislocatedonpage71.Compilinghisstockpricedatawiththisdividenddatawouldyield
aninterestingcomparison.]

Grahamoutlinesthevariouspredictionsastoexpectedfuturestockmarketpriceswhichheandhis
colleagueshadmadeatparticularpointsintheircareers.Theoverarchingconclusionofthishistoryis
thatpricesaredifficultifnotimpossibletopredict.Graham,forinstance,hadabouta50%success
rateinhisprediction,whichispreciselythatexpectedbychance.Inotherwords,thereisnoreasonto
assumethathispredictions,takenasawhole,werecorrectbyanyrigorousdefinitionoftheterm.

Despitethis,Grahamleavesuswithausefulsetofrecommendations,reprintedfromthe1964editionof
TheIntelligentInvestor :
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WHATCOURSETOFOLLOW

Investorsshouldnotconcludethatthe1964pricelevelisdangerousmerelybecausetheyreaditinthis
book.Theymustweighourreasoningagainstthecontraryreasoningthattheywillhearfrommost
competentandexperiencedpeopleonWallStreet.Intheendeachonemustmakehisowndecision
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65.
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75.
andacceptresponsibilitytherefor.Wesuggest,however,thatiftheinvestorisindoubtastowhich
coursetopursueheshouldchoosethepathofcaution.Theprinciplesofinvestment,assetforthherein,
wouldcallforthefollowingpolicyunder1964conditions,inorderofurgency:

1. Noborrowingtobuyorholdsecurities.
2. Noincreaseintheproportionoffundsheldincommonstocks.
3. Areductionincommonstockholdingswhereneededtobringitdowntoamaximumof50per
centofthetotalportfolio.Thecapitalgainstaxmustbepaidwithasgoodgraceaspossible,
andtheproceedsinvestedinfirstqualitybondsorheldasasavingsdeposit.

Investorswhoforsometimehavebeenfollowingabonafidedollarcostaveragingplancaninlogic
electeithertocontinuetheirperiodicpurchasesunchangedortosuspendthemuntiltheyfeelthemarket
levelisnolongerdangerous.Weshouldadviseratherstronglyagainsttheinitiationofanew
dollaraveragingplanatthelate1964levels,sincemanyinvestorswouldnothavethestaminatopursue
suchaschemeiftheresultssoonafterinitiationshouldappearhighlyunfavourable.