Source- The Intelligent Investor By Benjamin Graham
The Stock Market Level in early 1972
With a century-long conspectus of stock, prices, earnings, and dividends before our eyes, let us try to draw some conclusions about the level of 900 for the DJIA and 100 for the S & P composite index in January 1972.
In each of our former editions we have discussed the level of the stock market at the time of writing, and endeavored to answer the question whether it was too high for conservative purchase. The reader may find it informing to review the conclusions we reached on these earlier occasions. This is not entirely an exercise in self- punishment. It will supply a sort of connecting tissue that links the various stages of the stock market in the past twenty years and also a taken-from-life picture of the difficulties facing anyone who tries to reach an informed and critical judgment of current market levels. Let us, first, reproduce the summary of the 1948, 1953, and 1959 analyses that we gave in the 1965 edition:
In 1948 we applied conservative standards to the Dow Jones level of 180, and found no difficulty in reaching the conclusion that “it was not too high in relation to underlying values.” When we approached this problem in 1953 the average market level for that year had reached 275, a gain of over 50% in five years. We asked ourselves the same question-namely, “whether in our opinion the level of 275 for the Dow Jones Industrials was or was not too high for sound investment.” In the light of the subsequent spectacular advance, it may seem strange to have to report that it was by no means easy for us to reach a definitive conclusion as to the attractiveness of the 1953 level. We did say, positively enough, that “from the standpoint of value indications our chief investment guide-the conclusion about 1953 stock prices must be favorable.” But we were concerned about the fact that in 1953, the averages had advance redime insperiod than in most bull markets of the past, and that its absolute level was historically high. Setting these factors against our favorable value judgment, we advised a cautious or compromise policy. As it turned out, this was not a particularly brilliant counsel. A good prophet would have foreseen that the market level was due to advance an additional 100% in the next five years. Perhaps we should add in self-defense that few if any of those whose business was stock-market forecasting-as ours was not-had any better inkling than we did of what lay ahead.
At the beginning of 1959 we found the DJIA at an all-time high of 584. Our lengthy analysis made from all points of view may be summarized in the following (from page 59 of the 1959 edition): “In sum, we feel compelled to express the conclusion that the pres- ent level of stock prices is a dangerous one. It may well be perilous because prices are already far too high. But even if this is not the case the market’s momentum is such as inevitably to carry it to unjustifiable heights. Frankly, we cannot imagine a market of the future in which there will never be any serious losses, and in which, every tyro will be guaranteed a large profit on his stock purchases.”
