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Author: kahunacfa Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 2569  
Subject: The Market Now - Classic Investment Theory Date: 8/25/2007 1:59 PM
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Graham & Dodd's Approach to market Valuation

I believe that the current stock market is significantly over-valued, expensive; investors warrant caution. – Caution is always in order for investors. The ultimate, realized return on an investment is determined by the entry price paid to “Play the Game.”That said, I am not a “Market Timer” I can still, sometimes, find stocks that are attractive or potentially attractive at lower prices. This is true in almost every market – current market environment the S&P 500-stock index has an average Price Earnings Ratio of about 16.5 (Standard & Poor’s Corporation) the constant Quest for Investment Value goes on. This, on the surface is reasonable in the context of market history. The average P/E Ratio has been 16.1 since the Second World War. (Standard & Poor’s Corporation)

In the classic 1934 textbook Security Analysis the authors, Graham, Dodd, and Cottle presented the Value Approach to investing. This approach remains as valid today as it was in 1934. In the text book Security Analysis (op. cit.), taken as a whole, the authors argued that P/E Ratios should be based on a seven to ten year average basis; certainly no less than fives years.

The Graham & Dodd Valuation Approach computes a market P/E Ratio around 27, based on average profits of the last ten years. This is higher than it has been over the last 130 years with the exception of the “Irrational Exuberance (Alan Greenspan, 1996) and before the market swoon, beginning in the year 2000.

It is possible that the market will boom on, throwing caution to the wind. It is also possible that beggars will ride.


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Used with permission of the copyright holder on The Motley Fool message board “KahunaCFA’s Investment musings”. Elsewhere with proper MLA Citation.
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