Q&A: The Intelligent Investor – Chapter 3: A Century of Stock-Market History

Below are my reflections and answers to the discussion questions posted at Modern Graham for chapter 3 – A Century of Stock-Market History – of the Intelligent Investor written by Benjamin Graham. The Intelligent Investor

1. What quote from this chapter do you think best summarizes the point Graham is making?

“The investor’s portfolio of common stocks will represent a small cross-section of that immense and formidable institution known as the stock market. Prudence suggests that he have an adequate idea of stock-market history, in terms particularly of the major fluctuations in its price level and of the varying relationships between stock prices as a whole and their earnings and dividends. With this background he may be in a position to form some worthwhile judgment of the attractiveness or dangers of the level of the market as it presents itself at different times.”

2. Do you have any interesting anecdotes or experiences to share relating to some market highs or lows?

Not really. But in hindsight I wish that I had been a little less fearful, and a little greedier, during the financial crisis back in 2008-2009 and that I had taken better care of the opportunities present back then. With hindsight bias at your side I guess it’s always easy to feel that way.  

3. The market has been on a continued rise over the last couple of years.  Using data-based analysis, rather than emotion or “hunches” where do you expect the market to go in the next couple of years?

The hardest question of them all. Where do you expect the market to go? I don’t really know. Below is my expectations from the figures I’ve found at the moment for earnings growth, inflation and dividend yield.

If someone has some good resources where one can easily find data for earnings growth, dividend yield (S&P 500 etc) and inflation – feel free to share. Also, should share buy-backs be considered in the calculation below – money that could have been paid out as dividends and thus higher dividends and dividend yield? Any thought on this issue?

Earnings growth [1]             1.50% to 2.00%

Inflation [2]                                  + 1.58%

Dividend yield [3]                           + 1.81%

Expexted return:                 4.89% to 5.39%

Expexted return (after inflation): 3.31% to 3.81%

Earnings growth [4]              1.50% to 2.00%

Inflation [5]                                   + 2.00%

Dividend yield [6]                  2.03% to 3.30%

Expexted return:                   5.53% to 7.30%

Expexted return (after inflation): 3.53% to 4.03%

4. What did you think of the chapter overall?

I enjoyed the chapter. Interesting to see how history has emerged and how stock prices have fluctuated compared to earnings, dividends and CPI.

[1] Stocks for the Long Run (same as used by J. Zweig in the commentary chapter)
[2] http://www.multpl.com/inflation/
[3] http://www.multpl.com/s-p-500-dividend-yield/
[4] http://www.historicalstatistics.org/htmldata1/index.html
[5] http://www.riksbank.se/sv/Penningpolitik/Prognoser-och-rantebeslut/Aktuell-prognos-for-reporanta-inflation-och-BNP/
[6] http://www.gurufocus.com/global-market-valuation.php?country=SWEhttp://www.gurufocus.com/dividend/EWD

One thought on “Q&A: The Intelligent Investor – Chapter 3: A Century of Stock-Market History

  1. Hi,
    I have a question and I hope you can help me.

    In the second chapter (Inflation and Corp. Earnings part) Grahams advice is to expect 6% corporate earnings on current market price. Divided between a dividend yield an price growth due to reinvestments the same can be expected by the investor as a return.

    Now in the third chapters commentary (Whats next?) Jason Zweig uses the same calculation as you do above and assumes 2% growth rate for corporate earnings. Do I miss something? Is it maybe assumed to be the reinvested returns of 2%?

    Best regards

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