Stop Calling Companies Better: They’re Merely Dearer

Overview

It’s a symptom of a bull market: speculators devise novel rationales which, they contend, justify stocks’ high prices. Bulls sometimes concede that by previous standards today’s valuations are excessive. But, they hasten to add, it’s different this time: given the new rationales, old standards no longer apply.

During the boom, bulls don’t undertake analyses which might challenge – never mind disconfirm – their claims. Why ask uncomfortable questions? Why run the risk that you’ll unearth inconvenient truths? Why think independently and stand apart from the crowd? Indeed, why think at all?

Everybody, enthusiasts (or pragmatists) tell themselves, is making easy money; therefore, they assure themselves, it’s best to leave well enough alone. Enjoy the party while it lasts! After it ends, however, which it always does, former enthusiasts ruefully change their tune: they belatedly allege they “knew all along” that valuations were unsustainable because the rationales that “justified” them were invalid.

In sharp contrast, and as I detailed in How we’ve prepared for the next bust (28 November 2022), Leithner & Company undertakes sceptical – and thus highly contrarian – analyses during booms.

As I demonstrated in Never mind DeepSeek: here’s why the AI mania won’t last (3 February 2025), for example, today’s tech bulls are again ignoring and flouting reality. Ironically – and I assume unwittingly – they’re parroting the two-part mantra which Alan Greenspan and others chanted during the late-1990s – and, like the Dot Com Bubble which it inflated, collapsed during the early-2000s:

1. “Revolutionary technology” is now generating or shortly will produce a huge and permanent acceleration of productivity’s rate of increase. In the 1990s, it included biotech and genomics, telecoms and above all the Internet and its myriad applications; today, it includes crypto-currencies, EVs, solar and wind power and particularly Artificial Intelligence (AI).
2. This allegedly large and lasting leap of productivity, in turn, is supposedly producing or before long will generate the surge of profit which place tech stocks’ recent high returns – and current high valuations – on sound and sustainable bases.

In that article, I analysed decades of data which were available to but ignored by Greenspan and other tech zealots – and which debunked these claims.

In particular, I showed that “tech revolutions” don’t accelerate the growth of productivity – at least, since the Second World War they never have. “You can see the computer age everywhere but in the productivity statistics,” Robert Solow famously quipped in 1987 (the year he won the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel, usually but erroneously called “the Nobel Prize in Economics”).

Today, the same is true of AI. Claim #1 is false; therefore Claim #2 can’t be true.

In this article, I test three related assertions. According to one bull, and thanks to the evolution of companies and markets since the 1990s,

1. earnings – not just of tech firms but of all companies – have improved; in particular, profit margins and returns on equity have risen. Furthermore,
2. companies’ balance sheets have strengthened; in particular, they’re less leveraged.
3. Claims #1 and #2 justify companies’ and markets’ high valuations. As one bull recently exhorted: “stop calling markets expensive. They’ve just gotten better.”

This article demonstrates Claims #1 and #2 are either false or greatly exaggerated; consequently, they fail to support Claim #3.

American nonfinancial companies’ pre-tax profit margins are no higher today than they were in the 1950s and 1960s – when valuations were much lower than they are today. If high margins underpin today’s high valuations, why didn’t they then? After-tax margins have vaulted since the 1990s – when valuations scaled all-time highs. As a result, if higher margins beget higher valuations then the trend over the past 30 years contradicts the bulls’ allegation.

After-tax margins since the 1990s have recovered from historic lows. Moreover, to a significant extent their rise is the consequence of plunging corporate tax rates – particularly the huge cut of 2018 and its extension earlier this year.

Finally, these companies’ returns on equity (ROEs) aren’t higher, and their balance sheets aren’t less leveraged, than those of their forebears. In short, misleading and exaggerated claims can’t justify excessive valuations. Like most bull markets of the past, today’s rests upon unsound foundations.

“It ain’t what you don’t know that gets you into trouble,” the American writer, Samuel Clemens (Mark Twain) allegedly but sagely said. “It’s what you know for sure that just ain’t so.”

Beware the Passions of Youth

I’ve never met Kerry Sun, and I’ve read little of what he’s written. Clearly, however, although I don’t know his age, he’s young and passionate. (In contrast, I’m middle-aged and sceptical.) Equally obviously, youth and enthusiasm are liabilities as well as assets (see Don’t trust any “investor” under 30, 28 April, particularly the section entitled “Let’s Be Clear from the Start”).

Yet judging from a couple of his responses to comments, he’s prepared to adjust his views in response to valid logic and reliable evidence (I can’t say the same about a few prominent “analysts,” economists, funds managers and journalists). That’s an indication of intellectual honesty – which is a priceless quality.

Sun’s recent article, entitled Stop calling markets expensive. They’ve just gotten better (30 July), addresses an important topic – and, as bulls often do, gets things exactly back to front. Improved corporate finances don’t, as he claims, justify today’s high valuations. That’s because corporate finances haven’t strengthened. Instead, today’s excessive valuations have prompted bulls to assert – without compelling evidence – that profit margins, ROEs, etc., have improved.

In your personal life, confidence and passion can bear wonderful fruit. As an investor, however, they’re a liability. As Benjamin Graham wrote in In The Intelligent Investor: although “enthusiasm may be necessary for great accomplishments elsewhere, on Wall Street it almost invariably leads to disaster.”

Unknowingly Scoring an Own Goal

Warren Buffett is so rich not least because he’s so old (he turned 95 on 30 August). His financial net worth is presently approximately $160 billion; that ranks him among the world’s ten richest people. The majority of his wealth derives from his stake in Berkshire Hathaway. Although he’s controlled it since he was in his mid-30s, it’s generated ca. 95% of his financial net worth since his 65^th birthday.

Longevity clearly has much to do with – and for most people it’s likely a necessary condition of – the accumulation of wealth. Yet Kerry Sun’s invocation of life expectancy unintentionally exposes key weaknesses of the bulls’ case.

He chastises non-bulls: “everyone’s talking about expensive market valuations – but they’re missing the bigger picture.” Valuations, he concedes, are presently “frothy,” and perhaps even in “outright bubble territory.” However, “this narrative rests on a flawed assumption: that markets haven’t fundamentally evolved over the past two decades. Comparing today’s (earnings) multiples to historical averages is like comparing modern life expectancy to figures from the 1990s – you’re measuring entirely different realities.”

It’s undeniable: over the past few decades markets have evolved. So has human longevity. But like life expectancy, so too corporate data: if you unpack and analyse them, rather than merely invoke them, you’ll uncover some concerning developments. Memo to bulls: choose your analogies carefully!

Using data assembled by the World Bank, Figure 1 plots the life expectancy at birth of Americans, Australians, Canadians and residents of high-income countries as a whole born during each year since 1960. “Life expectancy at birth,” says the World Bank, “indicates the number of years a new-born infant would live if prevailing patterns of mortality at the time of its birth were to stay the same throughout its life.”

Figure 1a: Life Expectancy at Birth, by Country and Year, 1960-2023

A baby born in Australia 1960 could expect to live 70.8 years, its counterpart in Canada 71.1 years, in high-income countries as a whole 68.3 years and in the U.S. 69.8 years. In 1960 among these countries, Canada was the gold medallist, Australia took silver, the U.S. bronze and high-income countries as a whole didn’t appear on the podium.

In 2023, the most recent year for which comparable data are available, the rank ordering is very different: Australia leads the pack (83.1 years), Canada has been relegated to second place (81.7) and high-income nations (80.2) have pushed the U.S. (78.4) off the podium.

During the mid-1990s Australia began to overtake Canada, and in ca. 2010 it widened its lead as life expectancy continued to rise here and stagnated there. As a result, in Canada it was little higher in 2023 than in 2010 (81.3 years). In this country, however, over that interval it rose 83.1– 81.7 = 1.4 years.

Also in ca. 2010, life expectancy in high-income countries as a whole began to outstrip the U.S.: in those countries since then, it’s risen 80.2– 78.6 = 1.6 years. In the U.S., in contrast, it was effectively the same in 2023 (78.4 years) as in 2010 (78.5 years). The divergent experiences during the COVID-19 pandemic are particularly striking. From 2019 to 2021, life expectancy in Australia rose from 82.9 to 83.3 years. In Canada, it sagged slightly (from 81.5 to 81.3); in high-income countries as a whole it decreased more (from 80.2 to 78.8), and in the U.S. it fell most (from 78.8 to 76.3). Since then it’s rebounded in the U.S. (to 78.4 in 2023) but remains well behind the pack.

Even in the U.S., apart from a few minor falls (for example, seemingly as a consequence of the “Hong Kong flu” pandemic of 1968) and one major (COVID-19 pandemic) decrease, since 1960 life expectancy has risen without interruption.

Hence Kerry Sun’s analogy between high and rising life expectancy and stocks’ high and rising valuations:

1. Life expectancy in Australia is higher today than it was in, say, 1995; specifically, it’s increased 83.0 – 77.8 = 5.2 years. Similarly, Australian stocks’ valuations are higher today than they were 20-30 years ago.
2. But this doesn’t mean – despite today’s high valuations – that markets are overvalued: just as medical technologies, practices, etc., have unquestionably advanced greatly over the past generation, and thus helped to lift life expectancy, companies’ profit margins have allegedly increased and their balance sheets have purportedly strengthened. These developments, in turn, have supposedly – and sustainably – boosted valuations.
3. Accordingly, over the next 20-30 years and particularly in Australia, we can expect that life expectancy will continue to rise. Similarly, given today’s allegedly higher profit margins, etc., there’s apparently no reason to expect that Australian stocks’ or markets’ high earnings multiples will fall.

Figure 1b, which plots ten-year compound annual growth rates (CAGRs) of life expectancy at birth since 1960, implies that the analogy’s third claim is, in demographic terms, questionable – and not just in the U.S. (In 1960 life expectancy there was 69.8 years, and in 1970 it was 70.8 years; hence its CAGR over these ten years was 0.15% per year, i.e., 69.8 × (1.0015)¹⁰ ≈ 70.8, and so on for each succeeding 10-year period and the other series). It clarifies four developments which Figure 1a obscured: 

1. during the 1970s in each country, CAGRs accelerated;
2. during the 1980s they decelerated, and during the 1990s and into the new century they stabilised;
3. beginning in ca. 2005 – and thus well before the COVID-19 pandemic – in all countries life expectancy’s long-term (10-year) CAGR began to plummet;
4. except in Australia, the COVID-19 pandemic accelerated this plunge.

Figure 1b: Life Expectancy, Ten Year CAGRs, 1970-2023

In the U.S., the CAGR hasn’t just sharply decelerated: life expectancy fell in absolute terms from 78.7 years in 2019 to 76.3 years in 2022. Indeed, in 2020-2022 its 10-year CAGRs were negative.

Most recently, life expectancy in the U.S. has risen strongly (to an all-time but preliminary high of 79.3 years in 2024). Yet its 10-year CAGR remains negative (in 2013-2023, life expectancy fell 0.06% per year). In the other countries, the most recent CAGRs are just one-third of their averages since 1960.

Life expectancy’s level and rate of increase in the U.S. has long been lower than in Australia, Canada and other rich nations (particularly Japan and Scandinavia). Indeed, the U.S. began to lag behind this and other developed nations in the 1980s, and since then the gap has widened.

Several factors have contributed to these invidious developments. They include very high rising rates of chronic ailments (such as cardiovascular disease, diabetes, hypertension, etc.) and substance abuse. In particular, epidemic rates of obesity are a major concern.

Finally, significant disparities of health and mortality in the U.S. have persisted across different ethnic, racial and socio-economic groups. Hence the tragic irony: America spends considerably more on healthcare as a percentage of GDP than do other wealthy nations, yet it lags further behind them in overall health outcomes including life expectancy. Clearly, something’s gone badly awry.

The analogy between life expectancy and stocks’ valuations is thus the opposite of what Sun intends.

Measured as levels (years in Figure 1a), over the past 20-30 years life expectancy has increased; measured as rates of change (CAGRs in Figure 1b), however, long-term trends are much less favourable now than they were then. In two respects, I agree that “comparing today’s (earnings) multiples to historical averages is like comparing modern life expectancy to figures from the 1990s – you’re measuring entirely different realities.”

Firstly, and despite massive advances of medical technology, for many Americans today’s “health reality” is little better – and for some it’s worse – than in the 1990s. Secondly, for Australians and residents of high-income countries as a whole, it’s likely that life expectancy will henceforth improve much less slowly than hitherto. Moreover, given rapid rises of rates of obesity, etc., towards American levels, it’s possible that Australians’ “health reality” will increasingly resemble Americans’.

Comparing today’s earnings multiples to historical averages is indeed like comparing modern life expectancy to figures from the 1990s: you’re “measuring entirely different realities.” That’s hardly a bullish prognosis.

Data

It’s telling: Sun contends that Australian companies’ profit margins have risen – but offers no direct evidence to that effect. He claims that Australian “companies generate better returns on capital, maintain stronger balance sheets, and operate in more attractive industries; (therefore) they deserve higher multiples. The market isn’t being irrational, it’s recognising fundamental improvements in corporate quality.”

Yet he doesn’t demonstrate that Australian companies are generating better returns on capital, maintaining stronger balance sheets, etc. The unavoidable problem is that there exist no publicly-available Australian data which could substantiate the bulls’ case (or which would enable sceptics to disconfirm it).

Lacking publicly-available, relevant, valid and reliable data in this country, we must turn to the U.S.

That’s why I’ve analysed one of the three categories (non-financial businesses; the two others are banks and households) of the U.S. Financial Accounts (FAs). Formerly known as the Flow of Funds, FAs are a key component of a comprehensive system of macroeconomic data including the National Income and Product accounts. Data for FAs derive from corporate reports to various agencies, tax filings to the Internal Revenue Service and surveys conducted by the Federal Reserve System. The Fed releases the FAs on a quarterly basis.

The Fed has also aggregated quarterly FAs into three sets of annual income statements and balance sheets, i.e., for all banks, households and non-bank businesses since 1945; to my knowledge, no other country compiles and publishes a comparable – never mind a longer or more detailed – and publicly-available series of valid and reliable data.

Results

Profit Margins

FA records nonfinancial corporations’ total revenue; it also records their profits on before- and after-tax bases. Dividing each measure of profit by revenue provides two estimates of their profit margins; Figure 2 plots them annually since 1947.

At first glance, bulls seem to be correct: since the 1990s, American nonfinancial corporations’ profit margins have risen. Indeed, on a pre-tax basis they’ve quadrupled and on a post-tax basis they’ve trebled; as a result, on an after-tax basis the margins since 2019 (average of 14%) have exceeded their post-1947 average (9%).

Figure 2: Profit as a Percentage of Total Revenue, Nonfinancial Corporations, U.S. 1947-2024

For three reasons, however, bulls should curb their enthusiasm:

1. Profit margins have vaulted from historical troughs: except during the late-1940s, they’ve never been as low as they were in the late-1990s.
2. On a pre-tax basis, today’s margins no greater than they were during the 1950s and much of the 1960s, and only recently rose above their levels in the 1970s. In those decades, stocks’ valuations were much lower than they are today. If higher margins explain higher valuations now, why didn’t they then?
3. The recent boost of post-tax margins – in 2005-2017 they mostly trended downwards – likely owes little to companies operations and much to the recent decrease of corporate tax rates. This decrease, moreover, is the sharpest since 1945.

After-tax margins, in other words, have recently scaled historic highs partly because tax rates have plumbed historic lows.

Figure 3: Average Corporate Tax Rates, U.S., 1945-2025

Using data from taxfoundation.org, for each year since 1945 I’ve calculated a simple average of the various tax rates prevailing at given levels of income. Figure 3 plots the results. No doubt it omits subtleties; equally, it reflects four crucial developments:

1. in 1945, the corporate tax rate averaged 35%;
2. from 1950 to 1962, it averaged 40%, and from 1963 to 1968 it reached its post-war maximum (average of 41%);
3. since 1968, in occasional plunges, the average rate has fallen substantially: to 30% in 1985, where it remained roughly constant until 2018 – when the largest tax cut in a century reduced it to 21% (by far the lowest since the Second World War).
4. Consequently, from 1945 to 1975 the average rate of corporate tax exceeded the long-term average (33%); from 1976 to 2018 the rate closely approximated its long-term average; and since 2018 the rate has fallen well below it.

Donald Trump’s “One Big Beautiful Bill” (that’s its official name), which Congress enacted earlier this year, has made “permanent” the corporate tax rates established in 2018. As a result, since then America’s corporate tax rate has been, and into the indefinite future will remain, by far the lowest since the 1920s.

Leverage

These days, “capital discipline” is allegedly a fact: according to Kerry Sun, “the chronic capex blowouts that plagued Australian corporates in previous decades have largely disappeared, replaced by more measured and strategic spending.” In particular, “the median ASX 200 company carries substantially less debt than historical norms.”

FA records American nonfinancial corporations’ total assets; it also records their debts (both in the form of securities, such as commercial paper, bonds, etc., and also loans, mortgages, etc., from banks). I’ve summed these forms of debt and expressed the sum as a percentage of total assets and net assets (that is, equity). Figure 4 plots the results.

Figure 4: Non-financial Corporations’ Leverage, U.S., 1945-2024

Have American corporate balance sheets strengthened over the past 20-30 years? Has debt as percentages of assets and equity decreased? Not significantly: since 1995, debt has averaged 43% of total assets, and in 2024 it was 41%; also since 1995, debt has averaged 62% of equity, and in 2024 it was 58%. Since the 1990s, both series have been trendless.

Returns on Equity

“When companies generate better returns on capital, maintain stronger balance sheets, and operate in more attractive industries,” says Sun, “they deserve higher multiples.”

My corollary is: when companies don’t generate better returns on capital or maintain stronger balance sheets, then, other things equal, they don’t deserve higher multiples.

FA records nonfinancial corporations’ profits on pre-tax and post-tax bases; it also records their total assets and liabilities. I’ve expressed each form of profit as a percentage of nt assets (equity); Figure 5 plots the results. Reflecting their allegedly higher profitability and more efficient use of capital, has nonfinancial corporations’ return on equity (ROE) risen since the 1990s?

Figure 5: Non-financial Corporations’ Return on Equity, U.S., 1947-2024

After-tax ROE has risen from an average of 8.5% in the 1990s to an average of 10.8% over the past decade; statistically, that’s not a significant rise. However, not only is ROE lower today than in the immediate wake of the GFC: it was twice its current level throughout most of the 1950s and 1960s – when, it’s worth repeating, valuations were much lower than they are today.

Since 1947, pre-tax ROEs have been trending lower rather than higher; after-tax ROEs are trendless. Since ca. 2012, both series have trended downwards. Such trends hardly justify Kerry Sun’s claims – or today’s high valuations.

Conclusions and Implications

In this article, I’ve analysed data about American corporations. We can’t know the extent to which inferences from these data apply to Australia. Realistically, however, although Australian corporations are less leveraged than American ones, it’s very hard to believe that profit margins and ROEs are higher in Australia than in the U.S.

That’s not least because – here’s a key transformation which bulls have ignored – over the past 20-30 years Australia’s economy has become significantly less productive than America’s.

Enhanced productivity is generally a necessary precursor of improved profitability: it enables businesses to produce more output (and thus generate higher revenues) with the same or fewer resources (that is, at equal or lower cost). Increases of productivity maintain and lift profit margins – and thus ROEs.

The glaring problem for bulls is three-fold. Firstly, it’s not easy – without resorting to accounting tricks – to lift a company’s profitability unless you first boost its productivity. Secondly, productivity’s rate of growth in Australia is much lower today than it was in 20-30 years ago.

Indeed, thirdly and not lastly, productivity’s growth in Australia has recently plumbed all-time lows. That’s the opposite of what we’d expect if Sun’s claim were correct.

Figure 6 plots data collated by the Organisation for Economic Co-operation and Development. (These are some of the data, by the way, which Alan Greenspan and other tech zealots could easily have consulted at the height of the Dot Com bubble. They demonstrate unambiguously that during the late-1990s America’s long-term rate of productivity growth was lower than it had been at the beginning of the 1990s – and much lower than in the 1950s and 1960s.)

Figure 6: Labour Productivity, 10-Year CAGRs, Australia and the U.S., Quarterly, 1956-2025

Since the 1990s, productivity’s growth in the U.S. has boomed, busted and resumed growth; as a result, its current 10-year CAGR is much the same as its counterpart of 30 years ago. In sharp contrast, over the past 20-30 years growth in Australia hasn’t merely lagged growth in America: it’s plunged by more than 80%, from a 10-year CAGR of ca. 2.3% per year in 1995 to just 0.3% today. Moreover, since 2020 productivity growth has rebounded in the U.S. but has resumed its collapse in Australia.

Kerry Sun claims that “the Australian market has undergone a dramatic revolution that most investors have failed to grasp.” Specifically, compared to 20-30 years ago, Australian “companies (now) generate better returns on capital, maintain stronger balance sheets, and operate in more attractive industries; (therefore) they deserve higher multiples. The market isn’t being irrational, it’s recognising fundamental improvements in corporate quality.”

Productivity data show that the Australian economy has undergone a dramatic revolution that bulls fail to acknowledge. Moreover, FA data are unambiguous: American corporations certainly haven’t transformed in the manner which Sun alleges that Australian ones have.

We lack publicly-available data (i.e., the Australian equivalent of American FA data) to test these claims; but those which we do possess, and which address this key question indirectly, such as those in Figure 6, hardly imply “fundamental improvements in corporate quality.” Quite the contrary: they suggest a sharp deterioration.

On 13 August, The Australian Financial Review (“RBA issues shock warning of a poorer Australia as it cuts rates”) reported that the “RBA has warned weaker productivity growth means the economy would be smaller and poorer than would have otherwise been the case over the long term, including lower consumer spending, less investment and weaker tax revenues ... (These) implications of are already being felt ...”

Does Australia’s “productivity crisis” – a phrase which is now commonplace in mainstream media – justify its stocks’ high valuations?

I suspect that the RBA is placing an optimistic gloss upon Australian productivity’s deceleration. It’s true, as it stated in its Statement on Monetary Policy – August 2025, that productivity’s 20-year arithmetic average growth rate is 0.7% per year. However, the RBA omits to mention that its 10-year geometric mean (that is, its 10-year CAGR) is just 0.3% per year. The 10-year CAGR excludes earlier years when productivity grew more quickly; additionally, an arithmetic mean always exceeds its geometric counterpart (see also How you – and managed funds – overstate your returns, 24 October 2024).

To the extent that Figure 6 is a roughly accurate gauge, then American corporations deserve lower valuations now than they did before the GFC – and Australian companies deserve FAR lower ones than in the late-1990s and at the turn of the century.

In Australia today, productivity is abysmal – and market participants are blithely ignoring it. In contrast, in the U.S. in the 1990s, when valuations were sky-high, Americans celebrated mediocre productivity. Reviewing these data, Robert Shiller observed in Irrational Exuberance (Princeton University Press, 1^st edition, 2001): “even to the extent that productivity numbers were good, people read far too much into them ... Beyond this, people didn’t realize how tenuous the historical relation between productivity growth and stock market gains really is. Productivity growth hasn’t been a reason to expect the stock market to do well.”

That’s because consumers capture many of the benefits of productivity’s growth. Conversely, companies and investors eventually bear most of the costs of decelerating and stagnating productivity. So stop calling today’s companies better: they’re merely dearer and less productive than they once were.

Yet like Australians today, Americans during the Dot Com bubble couldn’t have cared less: the “hot” story in the 1990s – that the greatly exaggerated growth of productivity “justified and explained the spectacular stock market appreciation – was too good for stock market boosters and the news media to pass up.”

Not for the first time, enthusiastic bulls “just knew” what dispassionate and rigorous analysis, had they bothered to undertake it, would’ve disconfirmed. Today, the same point applies.

During bull markets, as Shiller detailed, bulls devise exaggerated or concoct invalid rationales to justify excessive valuations. They also – naively – contrast the allegedly exciting present and future to the supposedly dull past. They committed these errors most egregiously – and ruinously – during the “New Eras” of the 1920s and 1990s; they’re doing I again today.

Painful and costly lessons learnt at one point in time are mostly forgotten 15-20 years later. Hence each generation mostly repeats its forebears’ follies.

“Speculation,” noted John Kenneth Galbraith in A Short History of Financial Euphoria (Viking, 1990), is most prevalent “when popular imagination settles on something seemingly new in the field of commerce or finance ... When you see reference to a new paradigm you should always, under all circumstances, take cover ...” That’s because “speculative episodes never come gently to an end.”

Galbraith concluded: “the wise, though for most the improbable, course is to assume the worst. Neither regulation nor memory is a perfect protection against the will to delude one’s self or others.”

Summarising his experiences from the 1910s to the 1970s, Benjamin Graham agreed. “Evidently,” he concluded in The Intelligent Investor, “it is not only the tyro who needs to be warned that while enthusiasm may be necessary for great accomplishments elsewhere, on Wall Street it almost invariably leads to disaster.” In his Note about Graham in the book’s 2008 edition, Jason Zweig noted that it was “the first book I read when I joined Forbes magazine as a cub reporter in 1987, and I was struck by Graham’s certainty that, sooner or later, all bull markets must end badly.”

The pendulum swings, Zweig added, “as Graham knew it always does, from irrational exuberance to unjustifiable pessimism ... The same people who were eager to buy stocks in the late 1990s – when they were going up in price and, therefore, becoming expensive – sold stocks (in the early 2000s) as they went down in price and, by definition, became cheaper.”

As Graham demonstrated, that’s the opposite of rational action: “the intelligent investor realises that stocks become more risky, not less, as their prices rise – and less risky, not more, as their prices fall. The intelligent investor dreads a bull market, since it makes stocks more costly to buy. And conversely ... you should welcome a bear market, since it puts stocks back on sale. So take heart: The death of the bull market is not the bad news everyone believes it to be. Thanks to the decline in stock prices, (the bust) is a considerably safer – and saner – time to be building wealth.”

Zweig sagely concluded: “the people who take the biggest gambles and make the biggest gains in a bull market are almost always the ones who get hurt the worst in the bear market that inevitably follows. Being ‘right’ makes speculators even more eager to take extra risk, as their confidence catches fire ... Unless you are phenomenally lucky, that’s a recipe for disaster.”

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