I have been reading the intelligent investor, on chapter 4 page 91 Graham goes on to say..

While our proposed 50–50 division is undoubtedly the simplest “all-purpose program” devisable, it may not turn out to be the best in terms of results achieved. (Of course, no approach, mechanical or otherwise, can be advanced with any assurance that it will work out better than another.) The much larger income return now offered by good bonds than by representative stocks is a potent argument for favoring the bond component. The investor’s choice between 50% or a lower figure in stocks may well rest mainly on his own temperament and attitude. If he can act as a cold-blooded weigher of the odds, he would be likely to favor the low 25% stock component at this time, with the idea of waiting until the DJIA dividend yield was, say, two-thirds of the bond yield before he would establish his median 50–50 division between bonds and stocks. Starting from 900 for the DJIA and dividends of $36 on the unit, this would require either a fall in taxable bond yields from 7.5% to about 5.5% without any change in the present return on leading stocks, or a fall in the DJIA to as low as 660 if there is no reduction in bond yields and no increase in dividends. A combination of intermediate changes could produce the same “buying point.” A program of that kind is not especially complicated; the hard part is to adopt it and to stick to it not to mention the possibility that it may turn out to have been much too conservative.

could someone help me understand this part.

  1. What does he mean 36$ per unit on the DJIA yield.(from my understanding its 36% yield per basis point could someone elaborate more on this)
  2. I don't follow him from this point onwards "weigher of the odds" could someone elaborate more on the view he is trying to convey?

2 Answers 2

  1. $36 dividend/900 DJIA = 4%

  2. 5.5% bond yield = ($36 dividend/660 DJIA)

Graham wrote this at a very different time in financial markets- interest rates were much higher, and the DJIA much lower. In addition, bonds were yielding more than stocks, unlike today when the DJIA % the 10yr Treasury yield 2.63% and 2.13% respectively. In addition, his "weigher of the odds" suggests waiting to invest until equity prices are lower (usually dividends aren't reduced), and therefore the DJIA dividend yield would rise relative to bond yields.

  • Buy-and-hold has distinct advantages to 'buy low, sell high'. I own a security that pays 15.5% ROI per year. You only pay for a share once, but you continue to get the dividends as long as you own it. At 15.5% I will double my money in 4 years and 10 months. And I will keep on getting that dividend as long as I own the security. So it really does not matter if the price of that security goes up and down. Regardless of the fluctuations in price I get 15.5% on what I paid for it. Sep 23, 2015 at 2:08

I am also confused by what he says. The DJIA has not been at 900 for decades. However a $36 dividend is 4% per unit if you get $9 per unit per quarter. 2/3 of 4% is 6%,so that is inside his 7.5% to 5.5%.

How much you have in dividend paying stocks vs. Bonds most often is a function of your age. For example, I have heard the advice of subtracting your age in years from 110 and that would be the percent you hold in dividend paying stocks. At age 30 you would have 80% in stocks. At age 60 you would be 50% in stocks. There are retirement funds that do this for you.

But the 'bottom line' all depends on your risk tolerance. I have a large tolerance for risk. So even though I am currently retired I only have 10% of my money in a 'safe' investment (ticker=PGF). It pays 5.5% per year. The rest is in a leveraged junk bond fund (PHK) that pays 15.5% per year.


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