Bull Market: A Warning from Graham and Dodd – ValueWalk Premium
John Hussman Bull market Graham And dodd

Bull Market: A Warning from Graham and Dodd

Interesting piece whether you agree or not, below is a brief excerpt

Bull Market: A Warning from Graham and Dodd

John P. Hussman, Ph.D.

“During the latter stage of the bull market culminating in 1929, the public acquired a completely different attitude towards the investment merits of common stocks… Why did the investing public turn its attention from dividends, from asset values, and from average earnings to transfer it almost exclusively to the earnings trend, i.e. to the changes in earnings expected in the future? The answer was, first, that the records of the past were proving an undependable guide to investment; and, second, that the rewards offered by the future had become irresistibly alluring.

“Along with this idea as to what constituted the basis for common-stock selection emerged a companion theory that common stocks represented the most profitable and therefore the most desirable media for long-term investment. This gospel was based on a certain amount of research, showing that diversified lists of common stocks had regularly increased in value over stated intervals of time for many years past.

“These statements sound innocent and plausible. Yet they concealed two theoretical weaknesses that could and did result in untold mischief. The first of these defects was that they abolished the fundamental distinctions between investment and speculation. The second was that they ignored the price of a stock in determining whether or not it was a desirable purchase.

“The notion that the desirability of a common stock was entirely independent of its price seems incredibly absurd. Yet the new-era theory led directly to this thesis… An alluring corollary of this principle was that making money in the stock market was now the easiest thing in the world. It was only necessary to buy ‘good’ stocks, regardless of price, and then to let nature take her upward course. The results of such a doctrine could not fail to be tragic.”

Benjamin Graham & David L. Dodd, Security Analysis, 1934

Fourteen years ago, the S&P 500 reached what still stands as its most overvalued point in history. At the time, on the basis of a variety of valuation measures, we projected negative 10-year total returns for the S&P 500 over the following decade, even under optimistic assumptions. The general arithmetic behind these estimates is detailed in Ockham's Razor and the Market Cycle. The ratio of market capitalization to GDP reached 1.54 in 2000, which also offered a reasonably good indication of likely prospective total returns for the index over the decade to come. A fairly simple rule-of-thumb using market capitalization to GDP is presented in The Federal Reserve’s Two Legged Stool. In 2000, that rule-of-thumb estimate of prospective S&P 500 10-year nominal annual total returns would have been:

(1.063)(0.63/1.54)^(1/10) – 1.0 + .011 = -1.7% annually.

As is generally the case over time (though not always over short horizons), these estimates worked out swimmingly. By 2010, even after an 80% rebound from the March 2009 low, the S&P 500 had still posted a negative total return from its 2000 peak.

Bull market Graham And dodd

See full article by Hussman Funds

Comments (0)

  • jrainspe

    Yeah, but only fools are in it for the the entire period. I don’t believe anyone can time the market, but you can measure RISK in the market and making your investment decisions based on that, you can be in for more of the up times and out for more of the down times. The result is a higher return overall. Who cares if I get out 20% from the top, as long as I’m out for 80% of the down side and get back in on EITHER side of the bottom, +- 20%.

    September 16, 2014 at 5:17 am
  • M. Brent Pittman

    The best way to continue the US bull market is by creating good paying American jobs with good benefits for American citizens by repealing all sales/consumption taxes & replace the lost revenue with an import tax/tariff on imported labor (India & the Philippines) & manufactured goods (Mexico & Communist China, North Korea & Vietnam). Burn both the federal & state individual income tax codes & give each income receiving American citizen a $50000 standard deduction while keeping current dependent exemptions. Then tax the next $50000 at 2%, the next $50000 at 4%, the next $50000 at 6%, etc. until the federal & state budgets are balanced. Collect impact fees. NO corporate welfare. NO illegal aliens. Increase the minimum wage. Burn USA business & corporate income tax codes & place a “fair tax” (with a standard deduction of $10 Million) on ALL USA business & corporate sales/revenue including foreign after deducting compensation and benefits for American citizens’ labor; except for CEO’s and their immediate subordinates. Tax the second $10 Million at 1%, the third $10 Million at 2%, etc. All standard deductions & exemptions should be adjusted for inflation. Collect an export tax on natural resources/commodities such as oil, natural gas & grains. These strategies will reduce inflation, income inequality, declining real median family income and increase demand for “Made in America”.

    September 16, 2014 at 1:08 pm
    • Jean-Remy Lannelongue

      good ideas except your figures need a lot of work to balance the federal and state books…

      September 23, 2014 at 3:12 pm
      • M. Brent Pittman

        First, my strategies will reduce government spending. Second, my strategies will increase tax revenue because good pay jobs and company american revenues will increase. Third, progressive tax rates will continue to increase until the budgets are balanced.

        September 24, 2014 at 12:29 pm


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