I am out salmon fishing on the Moisie River. Back Thursday.
In the meantime, here’s a real treat, a lecture delivered by Ben Graham in 1963, courtesy of Jason Zweig.
To put you in the context, equities had peaked in December 1961 at 72 on the S&P 500. The bear market was short lived, –24% in 6 months. In November 1963, the S&P was back at 73, on its way to its next peak of 93 in January 1966. Interestingly, earnings rose throughout the whole period, from $3.03 in June 1961 to $5.55 in December 1966.
The absolute P/E on the S&P 500 Index peaked at 22.7 in November 1961, dropped to 15.8 in June 1962, rose to 19.1 in January 1965 before dropping to 13.9 in September 1966 with the S&P back again at 77, a severe 17% correction.
The Rule of 20 P/E peaked at 23.4 in November 1961, troughed at 17.0 in June 1962 and uncharacteristically remained around the 20.0 fair value level for 30 months (between April 1963 and October 1965), until inflation picked up after 7 years oscillating between 0.4% and 2.0%. It also troughed in September 1966 at 17.5, when inflation peaked at 3.8%.
There was no recession during the 9 years after Q4’60. The U.S. had gone through 4 recessions during the preceding 10 years.
Allow me two pieces of wisdom from the master:
- It is not in the nature of economic reality to permit net gains at the shown rates from 1949 to 1963 – something like 14% per annum including the dividend returns – to continue indefinitely in the future.
- In my nearly fifty years of experience in Wall Street I’ve found that I know less and less about what the stock market is going to do but I know more and more about what investors ought to do; and that’s a pretty vital change in attitude.
Enjoy.