The Intelligent Investor_ The Definitive Book on Value Investing - Benjamin Graham [31]
However, a point should be made here that is not disclosed in our table. The year 1970 was marked by a definite deterioration in the overall earnings posture of our corporations. The rate of profit on invested capital fell to the lowest percentage since the World War years. Equally striking is the fact that a considerable number of companies reported net losses for the year; many became “financially troubled,” and for the first time in three decades there were quite a few important bankruptcy proceedings. These facts as much as any others have prompted the statement made above* that the great boom era may have come to an end in 1969–1970.
A striking feature of Table 3-2 is the change in the price/earnings ratios since World War II.† In June 1949 the S & P composite index sold at only 6.3 times the applicable earnings of the past 12 months; in March 1961 the ratio was 22.9 times. Similarly, the dividend yield on the S & P index had fallen from over 7% in 1949 to only 3.0% in 1961, a contrast heightened by the fact that interest rates on high-grade bonds had meanwhile risen from 2.60% to 4.50%. This is certainly the most remarkable turnabout in the public’s attitude in all stock-market history.
To people of long experience and innate caution the passage from one extreme to another carried a strong warning of trouble ahead. They could not help thinking apprehensively of the 1926–1929 bull market and its tragic aftermath. But these fears have not been confirmed by the event. True, the closing price of the DJIA in 1970 was the same as it was 6½ years earlier, and the much heralded “Soaring Sixties” proved to be mainly a march up a series of high hills and then down again. But nothing has happened either to business or to stock prices that can compare with the bear market and depression of 1929–1932.
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 advanced for a longer