Intelligent Investor

The investor’s portfolio of common stocks will represent a small
cross-section of that immense and formidable institution known as
the stock market. Prudence suggests that he have an adequate idea
of stock-market history, in terms particularly of the major fluctuations
in its price level and of the varying relationships between
stock prices as a whole and their earnings and dividends. With this
background he may be in a position to form some worthwhile
judgment of the attractiveness or dangers of the level of the market
as it presents itself at different times. By a coincidence, useful statistical
data on prices, earnings, and dividends go back just 100
years, to 1871. (The material is not nearly as full or dependable in
the first half-period as in the second, but it will serve.) In this chapter
we shall present the figures, in highly condensed form, with
two objects in view. The first is to show the general manner in
which stocks have made their underlying advance through the
many cycles of the past century. The second is to view the picture
in terms of successive ten-year averages, not only of stock prices
but of earnings and dividends as well, to bring out the varying
relationship between the three important factors. With this wealth
of material as a background we shall pass to a consideration of the
level of stock prices at the beginning of 1972.

The investor’s portfolio of common stocks will represent a small
cross-section of that immense and formidable institution known as
the stock market. Prudence suggests that he have an adequate idea
of stock-market history, in terms particularly of the major fluctuations
in its price level and of the varying relationships between
stock prices as a whole and their earnings and dividends. With this
background he may be in a position to form some worthwhile
judgment of the attractiveness or dangers of the level of the market
as it presents itself at different times. By a coincidence, useful statistical
data on prices, earnings, and dividends go back just 100
years, to 1871. (The material is not nearly as full or dependable in
the first half-period as in the second, but it will serve.) In this chapter
we shall present the figures, in highly condensed form, with
two objects in view. The first is to show the general manner in
which stocks have made their underlying advance through the
many cycles of the past century. The second is to view the picture
in terms of successive ten-year averages, not only of stock prices
but of earnings and dividends as well, to bring out the varying
relationship between the three important factors. With this wealth
of material as a background we shall pass to a consideration of the
level of stock prices at the beginning of 1972.

The long-term history of the stock market is summarized in two
tables and a chart. Table 3-1 sets forth the low and high points of
nineteen bear- and bull-market cycles in the past 100 years. We
have used two indexes here. The first represents a combination of
an early study by the Cowles Commission going back to 1870,
which has been spliced on to and continued to date in the well.


on Wall Street with such fine achievements, and a quite illogical and
dangerous conviction that equally marvelous results could be
expected for common stocks in the future. Few people seem to have
been bothered by the thought that the very extent of the rise might
indicate that it had been overdone. The subsequent decline from the
1968 high to the 1970 low was 36% for the Standard & Poor’s composite
(and 37% for the DJIA), the largest since the 44% suffered in
1939–1942, which had reflected the perils and uncertainties after
Pearl Harbor. In the dramatic manner so characteristic of Wall
Street, the low level of May 1970 was followed by a massive and
speedy recovery of both averages, and the establishment of a new
all-time high for the Standard & Poor’s industrials in early 1972.

The annual rate of price advance between 1949 and 1970 works out
at about 9% for the S & P composite (or the industrial index), using
the average figures for both years. That rate of climb was, of course,
much greater than for any similar period before 1950. (But in the last
decade the rate of advance was much lower—51⁄4% for the S & P
composite index and only the once familiar 3% for the DJIA.)

The record of price movements should be supplemented by corresponding
figures for earnings and dividends, in order to provide
an overall view of what has happened to our share economy over
the ten decades. We present a conspectus of this kind in our Table
3-2 (p. 71). It is a good deal to expect from the reader that he study
all these figures with care, but for some we hope they will be interesting
and instructive.

Let us comment on them as follows: The full decade figures
smooth out the year-to-year fluctuations and leave a general picture
of persistent growth. Only two of the nine decades after the
first show a decrease in earnings and average prices (in 1891–1900
and 1931–1940), and no decade after 1900 shows a decrease in average
dividends. But the rates of growth in all three categories are
quite variable. In general the performance since World War II has
been superior to that of earlier decades, but the advance in the
1960s was less pronounced than that of the 1950s. Today’s investor
A Century of Stock-Market History 69
Record, 1926–65,” The Journal of Business, vol. XLI, no. 3 (July, 1968),
pp. 291–316. For a summary of the study’s wide influence, see http://
library.dfaus.com/reprints/work_of_art/.
cannot tell from this record what percentage gain in earnings dividends
and prices he may expect in the next ten years, but it does
supply all the encouragement he needs for a consistent policy of
common-stock investment.

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
70 The Intelligent Investor

The following data based largely on figures appearing in N. Molodovsky’s article, “Stock Values and Stock Prices,” Financial Analysts Journal,
May 1960. These, in turn, are taken from the Cowles Commission book Common Stock Indexes for years before 1926 and from the spliced-on
Standard & Poor’s 500-stock composite index for 1926 to date.
b The annual growth-rate figures are Molodovsky compilations covering successive 21-year periods ending in 1890, 1900, etc.

c Growth rate for 1968–1970 vs. 1958–1960.
d These growth-rate figures are for 1954–1956 vs. 1947–1949, 1961–1963 vs. 1954–1956, and for 1968–1970 vs. 1958–1960.

in 1970 was the same as it was 61⁄2 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 selfpunishment.
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 period than in most bull markets of the
72 The Intelligent Investor
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 present
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.”

The caution we expressed in 1959 was somewhat better justified
by the sequel than was our corresponding attitude in 1954. Yet
it was far from fully vindicated. The DJIA advanced to 685 in 1961;
then fell a little below our 584 level (to 566) later in the year;
advanced again to 735 in late 1961; and then declined in near panic
to 536 in May 1962, showing a loss of 27% within the brief period
of six months. At the same time there was a far more serious
shrinkage in the most popular “growth stocks”—as evidenced by
the striking fall of the indisputable leader, International Business
Machines, from a high of 607 in December 1961 to a low of 300 in
June 1962.

This period saw a complete debacle in a host of newly launched
common stocks of small enterprises—the so-called hot issues—
which had been offered to the public at ridiculously high prices
and then had been further pushed up by needless speculation to
levels little short of insane. Many of these lost 90% and more of the
quotations in just a few months.

The collapse in the first half of 1962 was disconcerting, if not
disastrous, to many self-acknowledged speculators and perhaps
A Century of Stock-Market History 73
to many more imprudent people who called themselves “investors.”
But the turnabout that came later that year was equally
unsuspected by the financial community. The stock-market averages
resumed their upward course, producing the following
sequence:
Standard & Poor’s
DJIA 500-Stock Composite
December 1961 735 72.64
June 1962 536 52.32
November 1964 892 86.28

The recovery and new ascent of common-stock prices was
indeed remarkable and created a corresponding revision of Wall
Street sentiment. At the low level of June 1962 predictions had
appeared predominantly bearish, and after the partial recovery to
the end of that year they were mixed, leaning to the skeptical side.
But at the outset of 1964 the natural optimism of brokerage firms
was again manifest; nearly all the forecasts were on the bullish
side, and they so continued through the 1964 advance.

We then approached the task of appraising the November 1964
levels of the stock market (892 for the DJIA). After discussing
it learnedly from numerous angles we reached three main conclusions.
The first was that “old standards (of valuation) appear
inapplicable; new standards have not yet been tested by time.”
The second was that the investor “must base his policy on the
existence of major uncertainties. The possibilities compass the
extremes, on the one hand, of a protracted and further advance in
the market’s level—say by 50%, or to 1350 for the DJIA; or, on the
other hand, of a largely unheralded collapse of the same magnitude,
bringing the average in the neighborhood of, say, 450"
(p. 63). The third was expressed in much more definite terms. We
said: “Speaking bluntly, if the 1964 price level is not too high how
could we say that any price level is too high?” And the chapter
closed as follows:
74 The Intelligent Investor

WHAT COURSE TO FOLLOW
Investors should not conclude that the 1964 market level is dangerous
merely because they read it in this book. They must weigh
our reasoning against the contrary reasoning they will hear from
most competent and experienced people on Wall Street. In the end
each one must make his own decision and accept responsibility
therefor. We suggest, however, that if the investor is in doubt as to
which course to pursue he should choose the path of caution. The
principles of investment, as set forth herein, would call for the following
policy under 1964 conditions, in order of urgency:
1. No borrowing to buy or hold securities.
2. No increase in the proportion of funds held in common stocks.
3. A reduction in common-stock holdings where needed to bring
it down to a maximum of 50 per cent of the total portfolio. The
capital-gains tax must be paid with as good grace as possible,
and the proceeds invested in first-quality bonds or held as a
savings deposit.

Investors who for some time have been following a bona fide
dollar-cost averaging plan can in logic elect either to continue their
periodic purchases unchanged or to suspend them until they feel
the market level is no longer dangerous. We should advise rather
strongly against the initiation of a new dollar-averaging plan at the
late 1964 levels, since many investors would not have the stamina
to pursue such a scheme if the results soon after initiation should
appear highly unfavorable.

This time we can say that our caution was vindicated. The DJIA
advanced about 11% further, to 995, but then fell irregularly to a
low of 632 in 1970, and finished that year at 839. The same kind of
debacle took place in the price of “hot issues”—i.e., with declines
running as much as 90%—as had happened in the 1961–62 setback.
And, as pointed out in the Introduction, the whole financial picture
appeared to have changed in the direction of less enthusiasm and
greater doubts. A single fact may summarize the story: The DJIA
closed 1970 at a level lower than six years before—the first time
such a thing had happened since 1944.

A Century of Stock-Market History 75
Such were our efforts to evaluate former stock-market levels. Is
there anything we and our readers can learn from them? We considered
the market level favorable for investment in 1948 and 1953
(but too cautiously in the latter year), “dangerous” in 1959 (at 584
for DJIA), and “too high” (at 892) in 1964. All of these judgments
could be defended even today by adroit arguments. But it is doubtful
if they have been as useful as our more pedestrian counsels—in
favor of a consistent and controlled common-stock policy on the
one hand, and discouraging endeavors to “beat the market” or to
“pick the winners” on the other.

Nonetheless we think our readers may derive some benefit from
a renewed consideration of the level of the stock market—this time
as of late 1971—even if what we have to say will prove more interesting
than practically useful, or more indicative than conclusive.
There is a fine passage near the beginning of Aristotle’s Ethics that
goes: “It is the mark of an educated mind to expect that amount of
exactness which the nature of the particular subject admits. It is
equally unreasonable to accept merely probable conclusions from a
mathematician and to demand strict demonstration from an orator.”
The work of a financial analyst falls somewhere in the middle
between that of a mathematician and of an orator.

At various times in 1971 the Dow Jones Industrial Average stood
at the 892 level of November 1964 that we considered in our previous
edition. But in the present statistical study we have decided to
use the price level and the related data for the Standard & Poor’s
composite index (or S & P 500), because it is more comprehensive
and representative of the general market than the 30-stock DJIA.
We shall concentrate on a comparison of this material near the four
dates of our former editions—namely the year-ends of 1948, 1953,
1958 and 1963—plus 1968; for the current price level we shall take
the convenient figure of 100, which was registered at various times
in 1971 and in early 1972. The salient data are set forth in Table 3-3.
For our earnings figures we present both the last year’s showing
and the average of three calendar years; for 1971 dividends we use
the last twelve months’ figures; and for 1971 bond interest and
wholesale prices those of August 1971.

The 3-year price/earnings ratio for the market was lower in
October 1971 than at year-end 1963 and 1968. It was about the same
as in 1958, but much higher than in the early years of the long bull
76 The Intelligent Investor.

This important indicator, taken by itself, could not be construed
to indicate that the market was especially high in January
1972. But when the interest yield on high-grade bonds is brought
into the picture, the implications become much less favorable. The
reader will note from our table that the ratio of stock returns (earnings/
price) to bond returns has grown worse during the entire
period, so that the January 1972 figure was less favorable to stocks,
by this criterion, than in any of the previous years examined. When
dividend yields are compared with bond yields we find that the
relationship was completely reversed between 1948 and 1972. In
the early year stocks yielded twice as much as bonds; now bonds
yield twice as much, and more, than stocks.

Our final judgment is that the adverse change in the bondyield/
stock-yield ratio fully offsets the better price/earnings ratio
for late 1971, based on the 3-year earnings figures. Hence our view
of the early 1972 market level would tend to be the same as it was
some 7 years ago—i.e., that it is an unattractive one from the standpoint
of conservative investment. (This would apply to most of the
1971 price range of the DJIA: between, say, 800 and 950.)
In terms of historical market swings the 1971 picture would still
appear to be one of irregular recovery from the bad setback suffered
in 1969–1970. In the past such recoveries have ushered in a
new stage of the recurrent and persistent bull market that began in
1949. (This was the expectation of Wall Street generally during
1971.) After the terrible experience suffered by the public buyers of
low-grade common-stock offerings in the 1968–1970 cycle, it is too
early (in 1971) for another twirl of the new-issue merry-go-round.
Hence that dependable sign of imminent danger in the market is
lacking now, as it was at the 892 level of the DJIA in November
1964, considered in our previous edition. Technically, then, the outlook
would appear to favor another substantial rise far beyond the
900 DJIA level before the next serious setback or collapse. But we
cannot quite leave the matter there, as perhaps we should. To us,
the early-1971-market’s disregard of the harrowing experiences of
less than a year before is a disquieting sign. Can such heedlessness
go unpunished? We think the investor must be prepared for difficult
times ahead—perhaps in the form of a fairly quick replay of
the the 1969–1970 decline, or perhaps in the form of another bullmarket
fling, to be followed by a more catastrophic collapse.3


The long-term history of the stock market is summarized in two
tables and a chart. Table 3-1 sets forth the low and high points of
nineteen bear- and bull-market cycles in the past 100 years. We
have used two indexes here. The first represents a combination of
an early study by the Cowles Commission going back to 1870,
which has been spliced on to and continued to date in the well.


on Wall Street with such fine achievements, and a quite illogical and
dangerous conviction that equally marvelous results could be
expected for common stocks in the future. Few people seem to have
been bothered by the thought that the very extent of the rise might
indicate that it had been overdone. The subsequent decline from the
1968 high to the 1970 low was 36% for the Standard & Poor’s composite
(and 37% for the DJIA), the largest since the 44% suffered in
1939–1942, which had reflected the perils and uncertainties after
Pearl Harbor. In the dramatic manner so characteristic of Wall
Street, the low level of May 1970 was followed by a massive and
speedy recovery of both averages, and the establishment of a new
all-time high for the Standard & Poor’s industrials in early 1972.

The annual rate of price advance between 1949 and 1970 works out
at about 9% for the S & P composite (or the industrial index), using
the average figures for both years. That rate of climb was, of course,
much greater than for any similar period before 1950. (But in the last
decade the rate of advance was much lower—51⁄4% for the S & P
composite index and only the once familiar 3% for the DJIA.)

The record of price movements should be supplemented by corresponding
figures for earnings and dividends, in order to provide
an overall view of what has happened to our share economy over
the ten decades. We present a conspectus of this kind in our Table
3-2 (p. 71). It is a good deal to expect from the reader that he study
all these figures with care, but for some we hope they will be interesting
and instructive.

Let us comment on them as follows: The full decade figures
smooth out the year-to-year fluctuations and leave a general picture
of persistent growth. Only two of the nine decades after the
first show a decrease in earnings and average prices (in 1891–1900
and 1931–1940), and no decade after 1900 shows a decrease in average
dividends. But the rates of growth in all three categories are
quite variable. In general the performance since World War II has
been superior to that of earlier decades, but the advance in the
1960s was less pronounced than that of the 1950s. Today’s investor
A Century of Stock-Market History 69
Record, 1926–65,” The Journal of Business, vol. XLI, no. 3 (July, 1968),
pp. 291–316. For a summary of the study’s wide influence, see http://
library.dfaus.com/reprints/work_of_art/.
cannot tell from this record what percentage gain in earnings dividends
and prices he may expect in the next ten years, but it does
supply all the encouragement he needs for a consistent policy of
common-stock investment.

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
70 The Intelligent Investor

The following data based largely on figures appearing in N. Molodovsky’s article, “Stock Values and Stock Prices,” Financial Analysts Journal,
May 1960. These, in turn, are taken from the Cowles Commission book Common Stock Indexes for years before 1926 and from the spliced-on
Standard & Poor’s 500-stock composite index for 1926 to date.
b The annual growth-rate figures are Molodovsky compilations covering successive 21-year periods ending in 1890, 1900, etc.

c Growth rate for 1968–1970 vs. 1958–1960.
d These growth-rate figures are for 1954–1956 vs. 1947–1949, 1961–1963 vs. 1954–1956, and for 1968–1970 vs. 1958–1960.

in 1970 was the same as it was 61⁄2 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 selfpunishment.
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 period than in most bull markets of the
72 The Intelligent Investor
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 present
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.”

The caution we expressed in 1959 was somewhat better justified
by the sequel than was our corresponding attitude in 1954. Yet
it was far from fully vindicated. The DJIA advanced to 685 in 1961;
then fell a little below our 584 level (to 566) later in the year;
advanced again to 735 in late 1961; and then declined in near panic
to 536 in May 1962, showing a loss of 27% within the brief period
of six months. At the same time there was a far more serious
shrinkage in the most popular “growth stocks”—as evidenced by
the striking fall of the indisputable leader, International Business
Machines, from a high of 607 in December 1961 to a low of 300 in
June 1962.

This period saw a complete debacle in a host of newly launched
common stocks of small enterprises—the so-called hot issues—
which had been offered to the public at ridiculously high prices
and then had been further pushed up by needless speculation to
levels little short of insane. Many of these lost 90% and more of the
quotations in just a few months.

The collapse in the first half of 1962 was disconcerting, if not
disastrous, to many self-acknowledged speculators and perhaps
A Century of Stock-Market History 73
to many more imprudent people who called themselves “investors.”
But the turnabout that came later that year was equally
unsuspected by the financial community. The stock-market averages
resumed their upward course, producing the following
sequence:
Standard & Poor’s
DJIA 500-Stock Composite
December 1961 735 72.64
June 1962 536 52.32
November 1964 892 86.28

The recovery and new ascent of common-stock prices was
indeed remarkable and created a corresponding revision of Wall
Street sentiment. At the low level of June 1962 predictions had
appeared predominantly bearish, and after the partial recovery to
the end of that year they were mixed, leaning to the skeptical side.
But at the outset of 1964 the natural optimism of brokerage firms
was again manifest; nearly all the forecasts were on the bullish
side, and they so continued through the 1964 advance.

We then approached the task of appraising the November 1964
levels of the stock market (892 for the DJIA). After discussing
it learnedly from numerous angles we reached three main conclusions.
The first was that “old standards (of valuation) appear
inapplicable; new standards have not yet been tested by time.”
The second was that the investor “must base his policy on the
existence of major uncertainties. The possibilities compass the
extremes, on the one hand, of a protracted and further advance in
the market’s level—say by 50%, or to 1350 for the DJIA; or, on the
other hand, of a largely unheralded collapse of the same magnitude,
bringing the average in the neighborhood of, say, 450"
(p. 63). The third was expressed in much more definite terms. We
said: “Speaking bluntly, if the 1964 price level is not too high how
could we say that any price level is too high?” And the chapter
closed as follows:
74 The Intelligent Investor

WHAT COURSE TO FOLLOW
Investors should not conclude that the 1964 market level is dangerous
merely because they read it in this book. They must weigh
our reasoning against the contrary reasoning they will hear from
most competent and experienced people on Wall Street. In the end
each one must make his own decision and accept responsibility
therefor. We suggest, however, that if the investor is in doubt as to
which course to pursue he should choose the path of caution. The
principles of investment, as set forth herein, would call for the following
policy under 1964 conditions, in order of urgency:
1. No borrowing to buy or hold securities.
2. No increase in the proportion of funds held in common stocks.
3. A reduction in common-stock holdings where needed to bring
it down to a maximum of 50 per cent of the total portfolio. The
capital-gains tax must be paid with as good grace as possible,
and the proceeds invested in first-quality bonds or held as a
savings deposit.

Investors who for some time have been following a bona fide
dollar-cost averaging plan can in logic elect either to continue their
periodic purchases unchanged or to suspend them until they feel
the market level is no longer dangerous. We should advise rather
strongly against the initiation of a new dollar-averaging plan at the
late 1964 levels, since many investors would not have the stamina
to pursue such a scheme if the results soon after initiation should
appear highly unfavorable.

This time we can say that our caution was vindicated. The DJIA
advanced about 11% further, to 995, but then fell irregularly to a
low of 632 in 1970, and finished that year at 839. The same kind of
debacle took place in the price of “hot issues”—i.e., with declines
running as much as 90%—as had happened in the 1961–62 setback.
And, as pointed out in the Introduction, the whole financial picture
appeared to have changed in the direction of less enthusiasm and
greater doubts. A single fact may summarize the story: The DJIA
closed 1970 at a level lower than six years before—the first time
such a thing had happened since 1944.

A Century of Stock-Market History 75
Such were our efforts to evaluate former stock-market levels. Is
there anything we and our readers can learn from them? We considered
the market level favorable for investment in 1948 and 1953
(but too cautiously in the latter year), “dangerous” in 1959 (at 584
for DJIA), and “too high” (at 892) in 1964. All of these judgments
could be defended even today by adroit arguments. But it is doubtful
if they have been as useful as our more pedestrian counsels—in
favor of a consistent and controlled common-stock policy on the
one hand, and discouraging endeavors to “beat the market” or to
“pick the winners” on the other.

Nonetheless we think our readers may derive some benefit from
a renewed consideration of the level of the stock market—this time
as of late 1971—even if what we have to say will prove more interesting
than practically useful, or more indicative than conclusive.
There is a fine passage near the beginning of Aristotle’s Ethics that
goes: “It is the mark of an educated mind to expect that amount of
exactness which the nature of the particular subject admits. It is
equally unreasonable to accept merely probable conclusions from a
mathematician and to demand strict demonstration from an orator.”
The work of a financial analyst falls somewhere in the middle
between that of a mathematician and of an orator.

At various times in 1971 the Dow Jones Industrial Average stood
at the 892 level of November 1964 that we considered in our previous
edition. But in the present statistical study we have decided to
use the price level and the related data for the Standard & Poor’s
composite index (or S & P 500), because it is more comprehensive
and representative of the general market than the 30-stock DJIA.
We shall concentrate on a comparison of this material near the four
dates of our former editions—namely the year-ends of 1948, 1953,
1958 and 1963—plus 1968; for the current price level we shall take
the convenient figure of 100, which was registered at various times
in 1971 and in early 1972. The salient data are set forth in Table 3-3.
For our earnings figures we present both the last year’s showing
and the average of three calendar years; for 1971 dividends we use
the last twelve months’ figures; and for 1971 bond interest and
wholesale prices those of August 1971.

The 3-year price/earnings ratio for the market was lower in
October 1971 than at year-end 1963 and 1968. It was about the same
as in 1958, but much higher than in the early years of the long bull
76 The Intelligent Investor.

This important indicator, taken by itself, could not be construed
to indicate that the market was especially high in January
1972. But when the interest yield on high-grade bonds is brought
into the picture, the implications become much less favorable. The
reader will note from our table that the ratio of stock returns (earnings/
price) to bond returns has grown worse during the entire
period, so that the January 1972 figure was less favorable to stocks,
by this criterion, than in any of the previous years examined. When
dividend yields are compared with bond yields we find that the
relationship was completely reversed between 1948 and 1972. In
the early year stocks yielded twice as much as bonds; now bonds
yield twice as much, and more, than stocks.

Our final judgment is that the adverse change in the bondyield/
stock-yield ratio fully offsets the better price/earnings ratio
for late 1971, based on the 3-year earnings figures. Hence our view
of the early 1972 market level would tend to be the same as it was
some 7 years ago—i.e., that it is an unattractive one from the standpoint
of conservative investment. (This would apply to most of the
1971 price range of the DJIA: between, say, 800 and 950.)
In terms of historical market swings the 1971 picture would still
appear to be one of irregular recovery from the bad setback suffered
in 1969–1970. In the past such recoveries have ushered in a
new stage of the recurrent and persistent bull market that began in
1949. (This was the expectation of Wall Street generally during
1971.) After the terrible experience suffered by the public buyers of
low-grade common-stock offerings in the 1968–1970 cycle, it is too
early (in 1971) for another twirl of the new-issue merry-go-round.
Hence that dependable sign of imminent danger in the market is
lacking now, as it was at the 892 level of the DJIA in November
1964, considered in our previous edition. Technically, then, the outlook
would appear to favor another substantial rise far beyond the
900 DJIA level before the next serious setback or collapse. But we
cannot quite leave the matter there, as perhaps we should. To us,
the early-1971-market’s disregard of the harrowing experiences of
less than a year before is a disquieting sign. Can such heedlessness
go unpunished? We think the investor must be prepared for difficult
times ahead—perhaps in the form of a fairly quick replay of
the the 1969–1970 decline, or perhaps in the form of another bullmarket
fling, to be followed by a more catastrophic collapse.