Broker Check

What would Benjamin Graham do? (stock valuations)

| January 04, 2021

Among the many indicators we follow is one taught by famed investor Benjamin Graham (Warren Buffet’s teacher). It is a simple comparison of the earnings yield for stocks compared to interest rates.  While the stock market is elevated and over valued by some measures, Graham's formula currently favors stocks because interest rates are so low. 

A case, and even a strong case can be made for stocks being over valued, but I believe this is a poor indicator for shorter term performance.  So while valuation presupposes returns in the future (for example high valuations point to lower returns over the next decade), it is not a reliable guide for the next year or so. 

In my opinion, the key to that formula is interest rates.

The views and opinions expressed herein are those of the author(s) noted and may or may not represent the views of Capital Analysts or Lincoln Investment.  The material presented is provided for informational purposes only. Nothing contained herein should be construed as a recommendation to buy or sell any securities. As with all investments, past performance is no guarantee of future results. No person or system can predict the market. All investments are subject to risk, including the risk of principal loss.