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On page 206 of the revised edition of Graham's, "The Intelligent Investor", Graham states:

It is far from certain that the typical investor should regularly hold off buying until low market levels appear, because this may involve a long wait, very likely the loss of income, and the possible missing of investment opportunities. On the whole it may be better for the investor to do his stock buying whenever he has money to put in stocks, except when the general market level is much higher than can be justified by well-established standards of value.

If I can still manage to find reasonably priced or bargain individual stocks despite the general market conditions, why then should generally high price levels dissuade me from purchasing those specific stocks? Wouldn't doing so be heeding "Mr. Market's" unjustified opinions, as Graham puts it, contradicting the earlier advice to ignore Mr. Market to the investor's advantage?

Or is there some global, negative effect that generally high market levels have on all stocks, regardless of price level, of which I am unaware?

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There is some amount of incoherence but what Graham is hinting at is that if one feels the general market prices are too high by a lot, then a correction or other adverse market events may occur soon. It's been shown that in times of market stress, stocks seemingly uncorrelated or with very low correlation now may exhibit some moderate amount of correlation. In that scenario, even if a stock looks like a good deal it may suffer from the adverse effect of other markets / prices.

However, as you noted, the argument that we are generally very poor at market timing should hold in this situation as well.

  • Thank you for your answer! Could you please provide a source on your claims about seemingly low correlation stocks being significantly correlated in times of high market stress? – kotu Aug 11 at 18:11
  • I don't have one specific link but the following Google search returns multiple research articles: correlation structure change in crisis – ApplePie Aug 11 at 18:36
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Questions like this are a can of worms. There's no one size fits all answer for how and when to invest.

I'd agree that the 'typical investor' should dollar-cost average regardless of market level because he's not sophisticated enough to do much more than that and he is even less likely to successfully effectuate the analysis Graham puts forth in his books.

Speaking of Graham, what he got right is that holding off until low market levels appear is likely to under perform because markets trend up for long periods (opportunity loss). The rest of the paragraph that you cited is pretty much CYA (buy stocks when you have money except when market is overvalued).

If you can find bargain priced stocks then the market's high level should not dissuade you. Many so called experts have been calling for a steep market correction for the last 10,000 DJIA points. Just be aware that when it hits the fan and the herd runs for the door (panic selling), undervalued is somewhat meaningless. If you look back at the 2008 GFC, there was nowhere to hide. With the DJIA down approximately 50%, of the 11 SPDR sectors, the 3 best performing ones with dividend reinvestment lost:

-43% Utilities

-37% Health

-31% Staples

Sometimes it's appropriate to go to the party and "Dance with the one that brung you" and remember to dance near the door. :->)

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