Intelligent Investor Chapter 3 Summary: A century of Stock Market history

A century of Stock Market history: The level of stock prices in early 1972

  • To get an idea of stock market history and fluctuations in price and the varying relations between stock price and their earnings and dividends. Deals with 100 year stock history from 1871 to 1971 and also in decades and market cycles(19).
  • 1900-24: 3-5 year market cycles. 3% annual return in 1924.
  • 1929: bull high and collapse. Fluctuations till 1949. 1.5% annual return in 1949.
  • 1949-68: rise - small setbacks and recoveries. DJIA: 162 to 995- 6X times in 17 years with 11% compounding annual return and dividend at 3.5%. This 14% overall returns made the public too enthusiastic.
  • 1968-70: decline of about 36% - second highest next to 44% decline in 1939-42 because of World War and Pearl Harbor.
  • 1970-72: Recovery
  • 1949-70: Return of 9% which is higher than years before 50s. But the last 10 years saw decline in advance at 5.25%.
  • Decade cycle data: Only 2 out of 9 decades show decrease in earnings and price. From 1900 on wards, there has never been a decline in dividend rate over 10 year cycles. Growth fluctuated. 60s were less prominent than 50s. In 1970, company earnings dropped and many companies reported losses and even bankruptcy - which led to the saying that the boom ended.
  • P/E in 1949 from 6.3 rose to 22.9 in 1961 and interest rates from 2.6 to 4.5. But the dividend rate fell from 7 to 3.
  • 1960s saw a rise and a decline.
  • 1948: DJIA 180-not too high.
  • 1953-275-rose by 50% in 5 years-average advanced for more than average in bull market- This made it to be cautious, but the market rose by another 50% in next 5 years.
  • 1959-584-dangerously high. But it rose to 685 in 61, dropped to 561, rose again to 735 and again dropped to 536 - 27% decline in 6 months. This was the period when growth stocks like IBM dropped from 607 to 300 and hot issues dropped by 90%. The shares bounced back in 1962 which was bearish till 64.
  • In 1964-892-old standards were inapplicable and new standards were untested-too high.
  • In 1970, DJIA declined to 839- lower than 6 years before- second time after 1944.
  • Graham predicts same as 1964 effects in 1972 based on - 3 year P/E that declined in 1971 more than in 1963/68 and was about same as in 1958. In 1972, stock to bond yield has worsened and dividend & bond yield have reversed from 1948(stock yield was twice bond yield) to 1972. Bond yield to stock yield ratio offsets the p/e. This situation makes it similar to that of 1964. But no imminent danger can be seen that happens because of recoveries that increase the bull swing.

Commentary:


You've got to be very careful if you don't know where you are going, because you might not get there.

  • Graham rightfully predicted the bear market of 1973-74 which has seen 37% decline.
  • Never forecast exclusively based on past. Future will always surprise us.
  • Value of any investment is a function of the price you pay for it.
  • Focusing just on market's recent rosy returns is dangerous.
  • Stock market's performance depends on - real growth(companies earnings and dividends), inflationary growth(general rise of prices), speculative growth or decline.
  • Based on Graham's valuation approach, Shiller compared current price of S& P index against average corporate profits over the past 10 years after inflation - if greater than 20, this led to poor returns. This wasn't very accurate, but still better.
Blessed is he who expects nothing, for he shall never be disappointed.
Blessed is he who expects nothing, for he shall enjoy everything.

See Intelligent Investor Summary for other chapters summary.

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