Benjamin Graham

Chapter 3 – A Century of Stock-Market History

Summary and Discussion – Chapter 3 – A Century of Stock-Market History:
The Level of Stock Prices in Early 1972
Notes on The Intelligent Investor by Benjamin Graham
Notes by Jason Fernando
Created November 18th 2013
Last updated November 18th 2013
Reference document: Graham, Benjamin, and Jason Zweig. The Intelligent Investor. Rev. ed. New York: HarperBusiness Essentials, 2003.

It is essential for the investor to “have an adequate idea of stock-market history, in terms particularly of the major fluctuations in 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.” [1]

This chapter concerns the relationship between stock prices, earnings, and dividends as it has presented itself over (at the time of Graham’s writing, i.e. between 1871 and 1972) the past 100 years.

Further Study: [On page 69, Graham mentions a chart of dividend data corresponding to this 100 year period. It is located on page 71. Compiling his stock price data with this dividend data would yield an interesting comparison.]

Graham outlines the various predictions as to expected future stock market prices which he and his colleagues had made at particular points in their careers. The overarching conclusion of this history is that prices are difficult if not impossible to predict. Graham, for instance, had about a 50% success rate in his prediction, which is precisely that expected by chance. In other words, there is no reason to assume that his predictions, taken as a whole, were “correct” by any rigorous definition of the term.

Despite this, Graham leaves us with a useful set of recommendations, reprinted from the 1964 edition of The Intelligent Investor: [2]


“Investors should not conclude that the 1964 price level is dangerous merely because they read it in this book. They must weigh our reasoning against the contrary reasoning that 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 unfavourable.”

[1] 65.
[2] 75.