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Is It Time To Throw Away Ben Graham's 'Intelligent Investor' Book?

May 06, 2020 12:25 AM ET15 Comments
Ralph Wakerly profile picture
Ralph Wakerly


  • We revisit market valuations using the Gordon Model, which shows returns in Plausible, Pessimistic and Optimistic scenarios of -45%, -59% and +2%, respectively.
  • A CAPE partial mean reversion model shows a drop of 16% and a 2008-09-style bear market loss of 49%.
  • These models and the current Federal Government and Fed actions call into question the validity of long-time financial principles of equity valuation.
  • Is it time to throw away the “Intelligent Investor” book by Ben Graham or are we approaching a once-in-a-century event as described by the brilliant investor Ray Dalio?

Recently, my nephew, who is an Executive VP of a large bank and a Certified Financial Analyst, sent me an email: “The stock market is insane. I have to throw away my Intelligent Investor book. It is no longer a market."

That and the recent market rebound of more than 25% prompted me to revisit my article from March, "How Low Can It Go? Possibilities from Dispassionate Market Valuation Models." Below, I show S&P 500 index return expectations from the Gordon Model, a discounted dividend method. The returns over the coming year under three scenarios, Plausible, Pessimistic and Optimistic, are -45%, -59% and +2% respectively. The CAPE partial mean reversion model shows a drop of 16% and a loss of 49% in a 2008-09 bear market scenario. These models and the current Federal Government and Fed actions call into question the validity of long-time financial principles of equity valuation.

Perhaps billionaire hedge fund investor Ray Dalio has the explanation in his brilliant LinkedIn article series. He lays out the case for why we may be entering an epic reset to the financial and political world order. Dalio warns: “But one cannot create more wealth simply by creating more money and credit. To create more wealth, one has to be more productive.

Revisiting the Market's Measured Value

In my article from March (linked to above), I demonstrated a Plausible, Optimistic and Pessimistic set of return expectations for the S&P 500 index, using the Gordon Discounted Dividend Model, the CAPE ratio and P/E ratio. Those outcomes are repeated for your convenience in the table below.

S&P 500 Index market returns under different valuation models

At the time of that writing (March 16), the impact of the coronavirus on GDP, employment, earnings, dividends and expected long-term economic growth was very unclear. Amid the early virus outbreak chaos and its exponential rate of infections, the market dropped to a low

This article was written by

Ralph Wakerly profile picture
Wakerly is an investor, entrepreneur and consultant with over 35 years of investment experience. Utilizes a macro-style, passive, index-based asset allocation investment style, with a value orientation and contrarian bent. Manages/advises on family portfolios collectively valued in the eight-figure range. B.S. Engineering and MBA in investments from University of Illinois. 11,000+ hours of investment management and research. Accomplished entrepreneur, consultant and business owner. Wakerly has a passion to help individuals improve their financial literacy and investing skills and besides writing for SeekingAlpha and Advisor Perspectives has presented at universities, churches and various webinars.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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