Complacency is the new speculation. The Great Wait Continues.

The Bear's Lair: Is Graham and Dodd obsolete?

For those who don't know it, "Security Analysis" is the Bible of value investing. It seeks to analyze companies by reference to their intrinsic value and to invest in those that appear especially cheap, in the expectation that at some future date their stock prices will correct to a more normal level in relation to their value. Warren Buffett was a pupil of Graham's at Columbia in 1950-51, completing a MSc in Economics. He worked for Graham for a few years and then in 1956, when Graham closed his partnership, Buffett opened his. He applied Graham's investment principles, albeit with a somewhat greater focus on the growth potential of the businesses in which he invested. 

Finally, there's the third possible explanation, that the outdatedness of Graham and Dodd, and its inapplicability to current markets, say something profound about today's economic position. Here I think there is a core of validity. We forget that a market that goes up by substantial amounts year after year, without any great surge in economic growth propelling it, is historically unprecedented and is causing unprecedented levels of distortion in the economic system. However, an elastic band distorted more than ever before will eventually break so in the same way an economic system distorted more than ever before will eventually collapse. The possibility of a soft landing, with a gradual wind-down of today's anomalies, is unlikely given the huge hidden stresses built up from the massive distortions. Hence, Graham and Dodd WILL eventually reassert itself, and is most unlikely to take a decade to do so. The timeframe is more likely 9-18 months.

DYI Comments:  I've been forecasting a peak to trough 45% to 60% decline for the S&P 500 which surprisingly will only have the market modestly undervalued.  It will take an additional market cycle before U.S. stocks bottom out on a secular basis with the Shiller PE10 under 10. However, for the completion of this cycle The Bear's Lair time frame of 9-18 months is along my line of thinking as well.  DYI's model portfolio with 45% short term bonds and 20% long term bonds provides lots of firepower to purchase stocks when panic is in full bloom.  For the long term investor this is only a transitory blink of an eye; the speculator it is eternity.  Complacency is the new speculation.  The Great Wait Continues.  

DYI