The Intelligent Investor: The Definitive Book On Value part 11. The purpose of this book is to supply, in a form suitable for laymen, guidance in the adoption and execution of an investment policy. Comparatively little will be said here about the technique of analyzing securities; attention will be paid chiefly to investment principles and investors’ attitudes. We shall, however, provide a number of condensed comparisons of specific securities - chiefly in pairs appearing side by side in the New York Stock Exchange list in order to bring home in concrete fashion the important elements involved in specific choices of common stocks | 86 Commentary on Chapter 3 below 10 stocks typically produce handsome gains down the road. In early 2003 by Shiller s math stocks were priced at about times the average inflation-adjusted earnings of the past decade-still in the danger zone but way down from their demented level of times earnings in December 1999. How has the market done in the past when it was priced around today s levels Figure 3-1 shows the previous periods when stocks were at similar highs and how they fared over the 10-year stretches that followed FIGURE 3-1 Year Price earnings ratio Total return over next 10 years 1898 1900 1901 1905 1929 1936 1955 1959 1961 1962 1963 1964 1965 1966 1967 1968 1972 1992 Averages Sources http shiller data Jack Wilson and Charles Jones An Analysis of the S P 500 Index and Cowles Extensions Price Index and Stock Returns 1870-1999 The Journal of Business vol. 75 no. 3 July 2002 pp. 527-529 Ibbotson Associates. Notes Price earnings ratio is Shiller calculation 10-year average real earnings of S P 500-stock index divided by December 31 index value . Total return is nominal annual average. Commentary on Chapter 3 87 So from valuation levels similar to those of early 2003 the stock market has sometimes done very well in the ensuing 10 years sometimes poorly and muddled along the rest of the time. I think Graham ever the conservative would split the difference between the lowest and highest past returns and project that over the next decade stocks will earn roughly 6 annually or 4 after inflation. Interestingly that projection matches the estimate we got earlier when we added together real growth inflationary growth and speculative growth. Compared to the 1990s 6 is chicken feed. But it s a whisker better than the gains that bonds are likely to produce-and .
