1975

The 1974-75 article — rediscovered and contextualised by Jason Zweig — sets out Graham's framework for assessing whether the stock market as a whole is over- or under-valued. Graham proposes a central-value estimate based on normalised earnings, a quality-adjusted capitalisation rate, and a comparison with bond yields. The output is a single ratio: market price divided by central value. Graham argues that the ratio is a useful signal when it falls well below or above one, and that the investor should adjust his stock-bond mix accordingly. The framework's distinctive feature is that it does not forecast the market's near-term direction. Graham is explicit that the central-value estimate is too coarse to time the market in any short window. Instead, the ratio of price to central value operates as a slow-moving indicator that nudges the investor toward a larger equity allocation when the market is broadly cheap and toward a smaller one when it is broadly dear. The investor's action is incremental, not all-or-nothing. Graham's article applies the framework to the period 1965-1975, showing how the price-to-central-value ratio drifted from expensive in the late 1960s to attractive in the 1974 bear market. The implicit conclusion is that an investor who had followed the framework across the decade would have reduced equity exposure through the 1968-1972 Nifty Fifty peak and increased it through the 1973-1974 bear, ending the decade with a portfolio mix that reflected the changed pricing of equities rather than the changed mood of investors.

The 1975 article formalises Graham's long-standing fifty-fifty bond-stock rule, with an explicit adjustment band. Graham recommends that the defensive investor hold a roughly equal split between high-grade bonds and a diversified list of common stocks, and rebalance when the mix drifts by more than five percentage points in either direction. The rebalancing discipline forces the investor to take profits from the asset that has risen and to add to the asset that has fallen — the opposite of what momentum would dictate. Graham's argument for the fifty-fifty rule is not theoretical optimality. He concedes that an investor who could correctly forecast the better-performing asset would do better by tilting toward it. His case is that few investors can forecast reliably, and that the mechanical rebalancing discipline captures the only edge most investors can credibly claim: the willingness to sell what has gone up and buy what has gone down, against the crowd. The 1975 article also introduces a valuation-conditioned variant: when the price-to-central-value ratio is well below one, the investor may hold up to seventy-five percent in equities; when it is well above one, the investor may reduce to twenty-five. Graham's working band is therefore twenty-five to seventy-five percent in equities, with the central case at fifty. The valuation-conditioned band preserves the discipline of the fifty-fifty rule while allowing the investor to act on Graham's view that the broad market can be visibly cheap or dear at long intervals.

The 1975 article engages the inflation question directly. Graham notes that the 1970s had seen both rising consumer prices and falling equity valuations, contradicting the then-common view that equities were an automatic inflation hedge. Graham argues that the relationship between inflation and equity returns is more complicated than the simple hedge thesis: high inflation raises interest rates, which raises the capitalisation rate applied to earnings, which compresses multiples even if nominal earnings rise. Graham's framework treats inflation as a tax on purchasing power that the equity investor pays indirectly through a higher discount rate. The implication for the analyst is that the equity investor cannot simply assume that nominal earnings growth will translate into real returns; the capitalisation rate matters as much as the earnings trend. Graham's article predates the formalised discounted-cash-flow language, but the underlying argument is the same: equity returns are determined by the entry multiple as well as by the cash-flow path. The 1975 article concludes that the 1973-1974 bear market had repriced equities at a level where, on Graham's central-value framework, the equity allocation should be increased. He notes that the same framework had called equities expensive through the 1968-1972 Nifty Fifty peak, and that an investor who had rebalanced according to the rule would have entered the 1973-1975 bear with a defensive posture. Graham treats this as evidence that the central-value framework, while imprecise, did its job across the decade.