Tuesday, December 1, 2015

EYC Ratio Falls to One...Time to Re-Think Stock/Bond Allocation???....The Stock Merchandise is in Dead Heat with Bonds Next 10-12 Years...5 Years or Less Caveat Emptor...Expect 45% to 60% DECLINE for Stocks!

Margin of Safety!
Central Concept of Investment for the purchase of Common Stocks.
"The danger to investors lies in concentrating their purchases in the upper levels of the market..."

Stocks compared to bonds:
Earnings Yield Coverage Ratio - [EYC Ratio]

EYC Ratio = [ (1/PE10) x 100] x 1.1] / Bond Rate
1.75 plus: Safe for large lump sums & DCA
1.30 plus: Safe for DCA

1.29 or less: Mid-Point - Hold stocks and purchase bonds.

1.00 or less: Sell stocks - Re-balance portfolio - Re-think stock/bond allocation.

Current EYC Ratio: 1.02
As of 12-1-15
Updated Monthly

PE10 as report by Multpl.com
DCA is Dollar Cost Averaging.
Lump Sum any amount greater than yearly salary.

PE10  .........26.30
Bond Rate...4.12%

Over a ten-year period the typical excess of stock earnings power over bond interest may aggregate 4/3 of the price paid. This figure is sufficient to provide a very real margin of safety--which, under favorable conditions, will prevent or minimize a loss......If the purchases are made at the average level of the market over a span of years, the prices paid should carry with them assurance of an adequate margin of safety.  The danger to investors lies in concentrating their purchases in the upper levels of the market.....

Common Sense Investing:
The Papers of Benjamin Graham
Benjamin Graham
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2 comments:

  1. AnonymousDecember 2, 2015 at 10:56 AM

    Hello Mr. Royer:

    Recall that the 1.075 x factor was recommended by investment expert Larry Swedroe. In a recent comment made on 11-29-15, he has recently escalated it a touch to 1.1. Here's his quote and explanation:

    "I would now use 1.1 instead because of faster growth in earnings due to higher earnings retention than was historically the case. Larry. "

    Regarding your December 1, 2015 calculation, it has little impact on the signal, as the 1.1 multiplier puts the ratio at 1.0 vs. 0.99. Insignificant difference. Your conclusion is valid. Stocks earnings yield and investment grade bonds are now in a dead heat.

    Best wishes for continuing success in the markets.

    Irish57

    ReplyDelete
  2. Dividend Yield InvestorDecember 3, 2015 at 1:42 PM

    Thank You Irish 57,
    I've looked on the net for Swedroe comments made on 11/29/15 if you can post me a link I will sure read it.

    I've changed to 1.1 to reflect retain earnings.

    Thanks Again,
    Kenneth E. Royer
    Chief Cook and Bottle Washer

    ReplyDelete

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