 Good day, fellow investors. A century, or better to say, a century and a half of stock market history. We continue with our discussion on the intelligent investor and Benjamin Graham's view on the world of investing, his view in 1972, and we are trying to apply his everlasting knowledge and wisdom to the current market situation. The main point Graham emphasizes, where we can learn so much from history are the following in chapter 3 of the book. The varying relationship between stock prices and their earnings and dividends is crucial to understand if you're a long-term investor. Varying relationship, I emphasize the varying. It is important to understand the manner in which stocks have made their underlying advance through the many cycles of the past century and look at 10-year average earnings, 10-year average dividends and 10-year average stock prices. So Graham's take on the stock market when looking from the 1901 till 1971 period is that there have been 19 bear markets with declines from 15 to 86, yes, 86 and 89% for the SAP 500. This was the 1929-1943 period, 89% down. So Graham says that we have to really be careful what's going on, accept the volatility, accept the declines and even take advantage of other people's stupid actions by us not doing stupid things. Let's dig into the book. So this is the chart from the chapter and Graham describes distinct patterns in the above stock market performance. From the 1900 till 1924 three to five-year market cycles were the norm with the average return of just 3% per year over 24 years. The dividend was pretty much higher, but that was a different era then. 1924 to 1929 the crazy bull market that resulted in the 1929-1943 bear market. What is very interesting is that the 1920s were the rowing 1920s, one of the best eras in human history. So after times are good, usually the consequences aren't that good and the debt ratios were also extremely high. Then from 1933 to 1949 there were a lot of fluctuations but the Dow and the SAP 500 reached the 1924 level only 25 years later and in 1949 there was absolutely no enthusiasm for stocks at all. So that's something difficult to understand now that we are all crazy about stocks. 1949-1961 greatest bull market in history with two short dips in 1957 and 1962, similarly to 2000 and 2008. Rings a bell? Well then the stock market advanced sixth fold in 17 years or 11% per year. 1971 Graham's comment is few people have been bothered by the thought that the very extent of the rise might indicate it had been overdone. He means the bull market. Apart from the interesting stock price movements Graham urges us with extreme importance even more important than the stock price movements to look at earnings dividends and fundamentals and look at them from a 10 year average perspective. So the average P ratio goes from 9.5 when it was great to buy stocks to levels of 18.1 when it wasn't that great to buy stocks for the long term. So always the price earnings ratio, the K per ratio, psychically adjusted price earnings ratio that uses 10 year averages tells you a big story. Then it's very interesting that the average dividend yield went from 6% down to 3.3% and now we are at 2% so the dividend yield went down in history. Further what is crucial for long-term investors and you will love it if you're a long-term investor in the nine analyzed decades only two decades have seen negative earnings growth. So on the whole stocks will deliver positive returns, positive earnings, positive growth over the long term. This is what we learned from the past 150 years of stock market history. So the message from the above is stocks will deliver growth over time only two out of nine decades have seen decline in earnings and price earnings ratio went from 6.3 in 1949 to 22.9 in 1961. Dividends fell from 7% to 3% even if bond yields went from 2.5 to 4.5%. So Graham describes it as the most remarkable turnaround in the public's attitude in all stock market history. Similarly now in 1982 the price-earnings ratio was 7.7 now we are at 25%. In the meantime bond yields did drop so stocks are much more attractive. We'll see what happens next. Let's see what Graham has to say about the stock market level in 1972 which is similar to where we are now or where we will be in a few years as the top was reached I think 1966 in Graham's era. Graham discusses how all standards of valuation appear inapplicable while new haven't yet been tested by time. The S&P 500 was at 100 points and what Graham focuses on is that bonds yielded twice as much as stocks. The case was opposite in 1949 when it was the best time to buy stocks. Further, Graham warned investors that they should be prepared for difficult times ahead. Was he right? You bet it. He got it correctly that stocks are dangerous and to show how prescient he was it took the S&P 500 10 years to surpass the previous level and the 47 drop in between with huge inflation levels in the decade. Before applying Graham insight onto the current market let's see what happened from 1982. The S&P 500 went up 25 times from 1982. So the stock market really resembles the era when Graham was writing his book and the last book edition. So are we going to see 10 years of negative earnings? Are we going to see 10 years of negative returns or the S&P 500 will continue to grow and grow? Nobody knows the answers. The key the only thing we can do is to be prepared for both opportunities and both outcomes. However, to keep Graham in mind we could quote Graham according to current valuations the investor should be prepared for difficult times ahead. So difficult times ahead, dead cycle like it was in 1929, 1930s we are there so there are also economics as a headwind but that's another story. Let's see what are the four main takeaways from Graham's chapter three. So the first takeaway is the stock market returns in the long run are dictated by earnings and the price earnings ratio is your best friend the k-pratio even better friend there is a link above with my description of what the k-pratio is. The second takeaway is that there are periods when nobody wants to touch stocks with a 10-foot pole think 1932, 1949, 1974, 1982 and there are periods where everybody is an investor even your neighbor is an investor looking at stocks cryptocurrencies whatever it's interesting how there are the cycles in the public's perception on what's going on in the stock market and whether stocks are good usually stocks are good and positively appreciated by the public after a 30 year bull market run when there is a 10 year negative returns then nobody likes stocks too risky crazy so think about in that perspective and what you're gonna do about it. The third takeaway is that long-term stock returns will be around 4% given the current price earnings ratio of 25 and cyclically adjusted price earnings ratio of 32. This thing's always balanced out in the long term so you might see stocks go up further than decline but 4% is what we can expect over the long term if you invest generally in stocks now. Note if the stock market crashes 50 60 70 percent that would be a blessing for most of you who are watching because then you could buy dollar cost average into much much cheaper prices much much higher yields much much better economics that will let you accumulate much more wealth over time so if the stock market crashes 50 70 percent tomorrow we should all especially if we are younger than 75 we should all take it as a blessing. The fourth thing to take away is that what happened in the past doesn't have to happen at all in the future and the only thing we can do is being prepared I don't want to scare you tomorrow I'll go through some comments of yours on some videos to maybe clarify some things and not trying to scare people I'm trying to prepare people so that we can sleep well whatever happens the stock market goes up another ten fold in the next 20 years great the stock market crashes 80 percent great that's my investing message and that's also Graham's investing message the key is to sleep well whatever happens in relation to the risk reward looking forward to the comments thank you for watching I'll see you tomorrow