1. Under 1972 conditions, the market is overpriced for common-stock. “In a typical case”, the earning power (earning yield) is now much less than 9% on the price paid.
2. Let us assume that by concentrating somewhat on the low-multiplier issues among the large companies a defensive investor may now acquire equities at 12 times recent earnings – i.e., with an earnings return of 8.33% on cost.
3. He may obtain a dividend yield of about 4%, and he will have 4.33% of his cost reinvested in the business for his account.
4. On this basis, the excess of stock earning power over bond interest over a ten-year basis would still be too small to constitute an adequate margin of safety.
5. For that reason, we feel that there are real risks now even in a diversified list of sound common stocks.
6. The risks may be fully offset by the profit possibilities of the list; and indeed the investor may have no choice but to incur them – for otherwise he may run an even greater risk of holding only fixed claims payable in steadily depreciating dollars.
7. Nonetheless, the investor would do well to recognize, and to accept as philosophically as he can, that the old package of good profit possibilities combined with small ultimate risk is no longer available to him.
Ref: Intelligent Investor by Benjamin Graham
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