Value Investing aka Benjamin Graham

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Value Investing aka Benjamin Graham

Post by Hal » Sun May 13, 2018 7:30 am

Hello All,

Just curious on your thoughts from this Boglehead thread where they discuss adjusting the stock/bond ratio based on valuation.
An even easier method is to just add the earnings yield to the bond yield and then divide each by that total. For example, using your numbers above:

Earnings yield: 4.71%
Bond yield: 2.94%
Total: 7.65%

Stock allocation = 4.71%/7.65% = 61.57%
Bond allocation = 2.94%/7.65% = 38.43%

As for when it goes to 75:25 or 25:75, that would depend on how different the two numbers became, with 25 or 75 simply being the outside boundaries during a time when either stocks or bonds were clearly over/under valued in relation to the other. In the handy numbers I had available (1997 onward) they never got quite that far apart. See this chart.

At first glance, it seems a reasonable approach.
Or if you wish to commit sacrilege, you could apply it to the PP stock/bond allocation. ;D


Reference: ... 0&start=50
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Re: Value Investing aka Benjamin Graham

Post by Tyler » Sun May 13, 2018 1:23 pm

While I find the strategy interesting, I'll point out that the impact of valuation depends on your asset allocation.

If you start from the mindset that stocks and bonds are both risky with a wide divergence of possible future performance, then I understand the draw to worry about things like valuations to avoid the worst outcomes. But if you invest in a provably consistent asset allocation like the Permanent Portfolio that keeps averaging the same basic return no matter the economic condition, then IMHO valuations are largely irrelevant.

Think of target practice.

First they give you a bow and arrow, and you measure the spread of holes around your target. That dispersion of results will be quite wide, and to get better you'll start thinking about things like wind conditions and body control to improve your next shot. It's the physical equivalent of researching the markets to maximize your next investment, and it requires a lot of effort to avoid sending a shot way off target.

Then they give you a gun. The wind is now irrelevant at normal distances, but smaller things like how you handle recoil get your focus if you're really into optimizing.

And finally they hand you a laser and you hit the center of the target every time. You could fret about the final position of individual electrons if you like, but at that point the tool and task are completely attached from the environment and you're much better off spending your energy on something more useful.

Choosing your portfolio is like choosing your weapon, and some are more consistent than others.

This may help visualize the same argument: ... -accuracy/ : a picture is worth a thousand calculations
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Re: Value Investing aka Benjamin Graham

Post by Hal » Tue May 15, 2018 5:22 pm

Thanks for your comments Tyler,

On pondering this matter a bit more, the PP takes valuations into account by rebalancing back to an even split between bonds and shares.
Interestingly, Benjamin Graham mentioned there were times when cash was a better option when both bonds and shares were overvalued.

Also found this table informative:
Post by bogle_graham » Tue Jun 22, 2010 9:47 pm

I ran some numbers using CyberBob's asset allocation using Robert Shillers historical data from his yale excel file.

I substituted Shiller's 10 year treasury yield for the Total Bond Index yield.

I found the following things interesting.

When stocks are very overvalued such as in the tech bubble of 2000, it correctly allocates more to bonds.

When stocks are very undervalued such as in 1932, it correctly allocates more to stocks.

What's most surprising about the numbers is how often is actually recommends an allocation of 50% stocks and 50% bonds and the exception is to be overweight either.

Some examples:
1929 - market about to crash, PE 33, bonds 3.39%, 48% stocks, 52% bonds
1932 - Great Deperession, PE 6, bonds 3.53%, 83% stocks, 16% bonds
1966 - bull market ends, PE 24, bonds 4.61%, 47% stocks, 52% bonds
1974 - crash, PE 8, bonds 7.90%, 59% stocks, 41% bonds
1982 - new bull starts, PE 7, bonds 13.86%, 50% stocks, 50% bonds
1990 - middle of bull, PE 15, bonds 8.39%, 43% stocks, 56% bonds
2000 - end of bull, PE 44, bonds 6.28%, 26% stocks, 73% bonds
2007 - real estate crash, PE 26, bonds 4.52%, 45% stock , 55% bonds
2009 - bear (bottom??), PE 13, bonds 2.82%, 72% stocks, 27% bonds
current - PE 20, bonds 3.85%, 56% stocks, 43% bonds

All in all, it seems like a solid Asset Allocation strategy not based on age, but on current market valuations.
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