Historical Perspective

I have extracted this from the 4th revised edition (the fifth version) of The Intelligent Investor by Benjamin Graham. Benjamin Graham used the term Portfolio Policy to describe allocations. His policy in 1973 was a stock and bond allocation of 50%-50% for defensive (conservative) investors. Reference: chapter 4, especially pages 42 and 43.

From page 42: "If, as we have long believed, the stock market has lost contact with its old bounds, and if the new ones have not yet been established, then we can give the investor no reliable rules by which to reduce his common-stock holdings toward the 25% minimum and rebuild them later to the 75% maximum..Thus we would counsel against a greater than 50% apportionment to common stocks at this time. But, for complementary reasons, it is almost equally difficult to advise a reduction of the figure well below 50%, unless the investor is disquieted in his own mind about the current market level, and will be satisfied to limit his participation in any further rise to, say, 25% of his total funds."

This was his advice for the enterprising (aggressive) investor, on page 74, about General Market Policy--Formula Timing: "The 50-50 plan...is about the best specific or automatic formula we can recommend to all investors under the conditions of 1972. But we have retained a broad leeway between the 25% minimum and the 75% maximum in common stocks, which we allow to those investors who have strong convictions about either the danger or the attractiveness of the general market level."

Stocks dropped sharply. The S&P500 hit its low in December 1974. A vicious, secular (long lasting) bear market extended from 1966 into early 1982. Inflation hid the severity of the damage. Inflation accelerated throughout the entire period.

Benjamin Graham gave good advice. Benjamin Graham’s constraint (25% to 75% for both stocks and bonds) minimizes regret.

I recommend that you pay lots of attention to what Benjamin Graham said. My research suggests that we can do better by not owning stocks at this time. It also shows that following Benjamin Graham’s advice costs very little. Quoting myself from Current Research B:

“Benjamin Graham’s constraints reduce today’s 30-year Safe Withdrawal Rate from 4.4% to 4.1%. This corresponds to a 95% likelihood of success.”

Current Research B

Have fun.

John Walter Russell
January 5, 2006