Premium: Graham’s rational argument why to never be 100% out of stocks (or in them)

It has been a wild ride in US stocks lately. First, Mr Market was panicked by Covid-stimulated, supply chain-wrought inflation which some pundits believe will become endemic. Then, as scary, there's a massive Russian troop build-up on the Ukrainian border..Yesterday showed us just how quickly sentiment can change. Russia tells the world it is pulling back some troops and immediately Mr Market's mood lifts. Suddenly he's also paying attention to the long-term deflation thesis of tech innovation driving down prices..Avoiding costly mistakes during this kind of whip-saw isn't easy for those who follow prices obsessively. That's why successful investing isn't the preserve of the super intelligent. Rather, it belongs to those able to control their emotions..___STEADY_PAYWALL___.Jason Zweig's column republished below draws on the wisdom of the man who taught us about this in his classic book The Intelligent Investor. If you haven't acquired your own copy, what are you waiting for? Last time I visited, SA's bookshops had plenty on the shelves..More for you to read today:.Major U.S. Stock Indexes Reverse Three Days of Losses. Stocks rise and oil and bond prices fall as investors watch Ukraine and Russia.Prince Andrew Settles Sex-Abuse Lawsuit Filed by Virginia Giuffre. Second son of Queen Elizabeth intends to make substantial donation to Giuffre charity, filing says.Will The 'Mask Rebellion' Fuel a Republican Landslide? New York's Rep. Kathleen Rice is the latest moderate Democrat to announce her retirement from Congress..PS Early warning on my two big webinars next week – on Wednesday at 6pm it's the post National Budget report from Cape Town. After a day in "lockup" I'll have plenty to share. Register by clicking here..Then on Thursday at noon I'll be back at our Bryanston HQ for the monthly portfolio webinar update which will include the purchase of my third and final tranche of our $10,000 BizNews Shyft portfolio. Exclusively for Premium members. Click here to register..The Intelligent Investor: The Trouble With a Bubble.WSJ columnist Jason Zweig draws on the wisdom of Benjamin Graham to help chart a course through current turbulence. .By Jason Zweig of The Wall Street Journal.On Monday, crude oil hit its highest price in more than seven years, creeping toward $100 a barrel. Federal Reserve officials called for policies that would raise interest rates to fight inflation, which recently hit a 7.5% annual rate. The Cboe Volatility Index—Wall Street's so-called fear gauge, nicknamed the VIX—rose roughly 10%..Valentine's Day didn't seem to bring investors much that they could love..Yet, after all this, U.S. stocks shot up yesterday on tentative indications that Russia might not invade Ukraine. And markets remain barely below record highs. The Dow Jones Industrial Average closed 6.1% below its all-time high set in early January; the S&P 500 is off 8.2% from its own record on Jan. 3..Are stocks in a bubble? Several times a day, I come across data online suggesting that U.S. stocks are the most expensive they've ever been.."Regression to the mean," in which extreme highs or lows move back toward the long-term average, seems inevitable..But what does "the mean" mean? Maybe the higher valuations of the present are abnormal. Maybe the low valuations of the past were..You can't answer that riddle even by using long-term numbers like those from Yale University economist Robert Shiller. As I wrote in last weekend's column, The Trouble With a Stock-Market Bubble:.…could the mean keep rising if corporate taxes stay low, interest rates remain moderate and new technologies keep transforming society?."The problem is, we don't know," says Prof. Shiller with a dry laugh..Years ago, I attended a dinner with a half-dozen of the smartest bond investors in the world. I asked, "Is the bond market a bubble?" Every single person said yes, nearly all of them emphatically..That was in 2011; they turned out to be wrong for more than a decade, as interest rates kept falling and bond prices kept rising..And if I had a dollar for every time a professional stock investor has told me that U.S. equities are a bubble, I'd have to roll the money to the bank in a wheelbarrow..Because bubbles are easy to spot in hindsight — What about 1929? Of course stocks were overpriced! Why do you think they call it the Roaring Twenties? And 1999? Can you believe people thought Enron and WorldCom and Pets.com were great companies? — it seems they should be easy to spot in foresight..But they aren't. Charles Mackay, author of the classic book known today as Extraordinary Popular Delusions and the Madness of Crowds, was a ferocious critic of human folly who mocked the speculative bubbles of the 17th and 18th centuries. He also witnessed a gigantic bubble in his own time and never even warned about it, evidently because he didn't think the prices of British railway stocks were out of line in the 1840s..Can you imagine living through this….and not calling it a bubble? That's exactly what Mackay did, as mathematician and financial historian Andrew Odlyzko has shown..All this is why the great investor Benjamin Graham believed that investors should never be entirely out of the stock market (or entirely in it, either). Without the benefit of hindsight, it's extraordinarily hard to be sure that a market is — or isn't! — in a bubble..Graham advised that when enthusiasm is high, you should trim back your stocks, but never to zero — and when pessimism prevails, you should raise your allocation to stocks, but never to 100%..Graham suggested keeping a minimum of 25% and a maximum of 75% in stocks, with the rest in bonds. As he wrote in 1949:.The chief advantage, perhaps, is that such a formula will give [the investor] something to do. As the market advances he will from time to time make sales out of his stockholdings, putting the proceeds into bonds; as it declines he will reverse the procedure. These activities will provide some outlet for his otherwise too-pent-up energies. If he is the right kind of investor he will take added satisfaction from the thought that his operations are exactly opposite from those of the crowd..Wise words, then and now..NB FOR YOUR WALL STREET JOURNAL ACCESS….As a Premium subscriber you are entitled to full membership of wsj.com (normal price $29 a month). Be sure to action your access through the Premium link on the BizNews website. Because of The Wall Street Journal's credential requirements, be sure to create a password which has at least 8 characters and includes at least one letter and one number – NB it MAY NOT contain any special characters (ie #, !, @ etc). 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Premium: Graham’s rational argument why to never be 100% out of stocks (or in them)

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