Investing - Theory, News & General • With interest rates this high are you increasing your equity return expectations?

Decreasing due to Ben Graham's formula comparing ST Treasury Yield to S&P500 Earnings yield.

About 35 / 65 % stock / bond ratio given current yields.

Bonds more attractive at present time.

You can also see Buffett building cash levels, student of Graham.

What is Graham's formula?

I mean, I get the conceptual gist of what you're implying, but curious as to the actual formula.

Stock Allocation = Shiller PE Earnings Yield / ( Shiller PE Earnings Yield + ST Treasury Yield)
= 2.95 / (2.95 + 5.5) = 35%

you could also use S&P 500 Earning Yield
I used 1 month T Bill

So if I use S&P 500 Earnings Yield 3 month T-bill I get:

3.71 / (3.71 + 5.39) = 3.71 / 9.1 = 41% stock

Not that far off

How do you know when to change? I am 60/40 stock to bond at the moment.

It's not my formula or my theory.

Nor do I follow it, except as a matter of intellectual curiosity.

But there is this:

"Our basic recommendation is that the stock portfolio, when acquired, should have an overall earnings/price ratio—the reverse of the P/E ratio—at least as high as the current high-grade bond rate. This would mean a P/E ratio no higher than 13.3 against an AA bond yield of 7.5%."

Chapter 14: Stock Selection for the Defensive Investor, The Intelligent Investor.

https://www.grahamvalue.com/blog/adjust ... ions-today

At today's 5.41% 3 month T-bill yield, that would suggest an earnings raton >= 5.41, or a PE no greater than 18.51.

FWIW:

VXUS PE = 15.0
VTI PE = 25.1

So Grahamonomics would suggest heavily tilting to ex-US.

Statistics: Posted by watchnerd — Mon May 06, 2024 11:26 pm — Replies 110 — Views 14970

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