Federal Reserve Intervention has Distorted Markets!

DYI:  As much as I admire Benjamin Graham please note that interest rates have been subjected to massive Federal Reserve intervention so much so yields are at sub atomic lows.  In my judgment has distorted Ben’s famous indicator.  No doubt stocks will out perform bonds – stocks held or purchased today go to sleep like Rip Van Winkle awake ten years hence - but beware out performance may simply mean losing less money!

Be as that may be, for those who desire to purchase stocks at this level it would be advisable to move down to the lower level tier high quality arena or more commonly called equity income funds.  They stress reasonable growing companies with above average yields and significantly reduced average PE multiples.  This will provide a far better chance – using Rip Van Winkle example – of coming out on top with a gain above all costs especially inflation and of course out doing bond returns.  DYI’s favorite as you may have guessed is Vanguard’s Equity Income Fund symbol VEIPX.  Most 401k’s have these type of funds as well.       

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 - Purchase Bonds

Current EYC Ratio: 1.51(rounded)

As of  10-1-20
Updated Monthly

PE10 as report by Multpl.com

Bond Rate is the rate as reported by

Vanguard Long-Term Investment-Grade Fund Investor Shares (VWESX)

DCA is Dollar Cost Averaging.
Lump Sum any amount greater than yearly salary.

PE10  ..........31.05
Bond Rate...2.34%

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