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Posted by Elle on March 5, 2008, 5:04 am
snip as usual for conciseness and hopefully not losing
meaning
> I can see your point at least in the sense that Graham
> might have considered a high P/E stock to be more risky
> that a low P/E stock (although I would not call P/E a risk
> measure, I would call it a valuation measure - related,
> but not the same).
I believe I can appreciate how you do not call P/E a risk
measure. But it seems to me Graham most assuredly does
consider it so. That is, roughly, I think Graham is saying
High P/E = poor bargain = poor chance for increasing
further, relative to lower P/E stocks. Apply a number of
crude gages together (like low P/E; dividends for the last
20 years; current ratio over 2; etc.), and one can lower the
risk further. Or at least backtesting indicates thusly.
Perhaps it is a mere semantical difference between us.
> But in my reading of his two most popular books, I have
> not seen any mention of using P/E (or some combination of
> quantitative values) to determine the relative risk of
> each holding and thus determine if you need to diversify
> further as Ron suggested.
>From my reading of his writings, I agree. But I do think
that one might surmise Graham is acutely aware of how
imprecise estimating risk is, at least in the context you
suggest here with individual stocks. Graham is circumspect.
He does not speak as though it's all black and white. That's
TV loudmouth stock "analyst" Jim Cramer's job, anyway.
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