Ben Graham's Corner

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]
Lump Sum any amount greater than yearly salary.

PE10  .........35.14
Bond Rate...5.16%
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: 0.61(rounded)
As of  4-1-24
Updated Monthly

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

2 comments:

  1. AnonymousJuly 21, 2014 at 3:20 PM

    Dear Mr. Royer,

    John Hussman, Ph.D. is a very smart man, but Ben Graham was smarter. Hussman has been wrong a long time now in this bull market. For investors following Ben Graham's "margin of safety" model, they are still enjoying gains in the market, vs. Hussman's dismal performance.

    For fair-and-balanced to Dr. Hussman's doomsday forecast, please find at the link the newest academic paper from Lleo and Ziemba on the bond-stock yield model, and its ability to predict stock market crashes.

    The data tested over a 50 year period of the US stock market used the 10 year treasury bond as the bond comparator to CAPE earnings yield. It was found to have a predictive accuracy rate of crashes of 70%.

    Regardless of which bond maturity is used, Graham's model has withstood the test of time and now has a duel benefit of warning "defensive investors" of most crashes and bear markets.

    IMHO: Dr. Hussman's work is interesting, but Ben Graham's teaching "is the financial equivalent of Einstein's theory of relativity:--i.e. judge the attractiveness of stocks by the bond yield." (line borrowed from the article at link by author DeFeo .

    LINK: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2409310

    LINK: http://www.thestreet.com/story/10768648/1/benjamin-graham-stocks-ugly-bonds-uglier.html

    Thanks for your time and consideration. I most enjoy your website, and the chance to exchange ideas and value investing approaches.

    Sincerely,
    Irish57

    ReplyDelete
  2. Dividend Yield InvestorJuly 22, 2014 at 1:05 PM

    Thank you Irish57 for the high quality work. I have my reading assignments that I'll go over in the next few days.

    Thank you again for sending me John Kingham's formula it is what I've been looking for over the last 15 years. A real gift.

    Thank you again,
    Kenneth E. Royer Editor (Chief cook and bottle washer of this blog)

    ReplyDelete

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