A Bourse Diary

Thoughts on stocks, speculation and ... life

Friday, June 16, 2006

Grahams Margin of Safety for the US Stocks

A nice view on the valuation of the US stock market through the eyes of the investment classics - the US Market Blog (link below) reminds us of Graham's Margin of Safety model.

It it surely not the first time to compare earning of stocks, hence stocks earnings rate, with the interest rate on long term bonds. Though, I think the investors tend to oversee or forget this important ratio especially in times of uncertainty and volatile movements.

The article provides a nice graph of the Margin of Safety Model (explained there - a relative figure of stocks and bond earnings) calculated for the time since 1988, and ... well both bulls and bears will find their arguments on it:

The US stocks have traded since 1988 almost all the time with "negative" margin of safety. If you have followed Graham's model, you may have missed some of the greatest bull markets. But there is also that point: the best time to buy was in retrospect when stocks had positive margin of safety (even if slightly, or if you don't want to be that exact - when margin of safety was around zero) - e.g. 1994-1995 and 2003, and on the other side: it was mostly very bad time to buy stocks, when margin of safety was strongly in negative terrain. (Chart is provided as well).

Now we are strongly positive, considerably positive...

The author ends up suggesting, like I do, that this circumstances do provide us substantial "safety" in the current situation. When the earnings of the US companies do not collapse, even with decreasing earnings and slowly raising interest rates and (suppose: slowly) falling stock prices, the market remains very well grounded with enough inner safety.

And, for I do not believe we have had or have an extreme phase at the stock markets (so that additional factors have to be considered), I suppose, the logic of finance, of relative attractivity of investments, of capital as a whole have to take overhand.

US Market » The Current Graham Margin of Safety for the US Market

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Disclaimer: All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and are in no way intended to serve as personal investing advice and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Readers should not make any investment decision without first conducting their own thorough due diligence. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed.