The Intelligent Investor_ The Definitive Book on Value Investing - Benjamin Graham [272]
9 Ibbotson Associates, Stocks, Bonds, Bills, and Inflation, 2003 Handbook(Ibbotson Associates, Chicago, 2003), Table 2-8. The same pattern is evident outside the United States: In Belgium, Italy, and Germany, where inflation was especially high in the twentieth century, “inflation appears to have had a negative impact on both stock and bond markets,” note Elroy Dimson, Paul Marsh, and Mike Staunton in Triumph of the Optimists: 101 Years of Global Investment Returns (Princeton University Press, 2002), p. 53.
10 Thorough, if sometimes outdated, information on REITs can be found at www.nareit.com.
11 For further information, see www.vanguard.com, www.cohenandsteers. com, www.columbiafunds.com, and www.fidelity.com. The case for investing in a REIT fund is weaker if you own a home, since that gives you an inherent stake in real-estate ownership.
12 A good introduction to TIPS can be found at www.publicdebt.treas.gov/ of/ofinflin.htm. For more advanced discussions, see www.federalreserve. gov/Pubs/feds/2002/200232/200232pap.pdf, www.tiaa-crefinstitute.org/ Publications/resdiags/73_09-2002.htm, and www.bwater.com/research_ ibonds.htm.
13 For details on these funds, see www.vanguard.com or www.fidelity.com.
* “It is said an Eastern monarch once charged his wise men to invent him a sentence, to be ever in view, and which should be true and appropriate in all times and situations. They presented him the words: ‘ And this, too, shall pass away.’ How much it expresses! How chastening in the hour of pride!—how consoling in the depths of affliction! ‘And this, too, shall pass away.’ And yet let us hope it is not quite true.”—Abraham Lincoln, Address to the Wisconsin State Agricultural Society, Milwaukee, September 30, 1859, in Abraham Lincoln: Speeches and Writings, 1859–1865 (Library of America,1985), vol. II, p. 101.
* “Earning power” is Graham’s term for a company’s potential profits or, as he puts it, the amount that a firm “might be expected to earn year after year if the business conditions prevailing during the period were to continue unchanged” (Security Analysis, 1934 ed., p. 354). Some of his lectures make it clear that Graham intended the term to cover periods of five years or more. You can crudely but conveniently approximate a company’s earning power per share by taking the inverse of its price/earnings ratio; a stock with a P/E ratio of 11 can be said to have earning power of 9% (or 1 divided by 11). Today “earning power” is often called “earnings yield.”
* This problem is discussed extensively in the commentary on Chapter 19.
* Graham elegantly summarized the discussion that follows in a lecture he gave in 1972: “The margin of safety is the difference between the percentage rate of the earnings on the stock at the price you pay for it and the rate of interest on bonds, and that margin of safety is the difference which would absorb unsatisfactory developments. At the time the 1965 edition of The Intelligent Investor was written the typical stock was selling at 11 times earnings, giving about 9% return as against 4% on bonds. In that case you had a margin of safety of over 100 per cent. Now [in 1972] there is no difference between the earnings rate on stocks and the interest rate on stocks, and I say there is no margin of safety…you have a negative margin of safety on stocks…” See “Benjamin Graham: Thoughts on Security Analysis” [transcript of lecture at the Northeast Missouri State University business school, March, 1972], Financial History, no. 42, March, 1991, p. 9.
* This paragraph—which Graham wrote in early 1972—is an uncannily precise description of market conditions in early 2003. (For more detail, see the commentary on Chapter 3.)
* In “American” roulette, most wheels include 0 and 00 along with numbers 1 through 36, for a total of 38 slots. The casino