I've been reading The Intelligent Investor lately, and recently came to an interesting part of the book. Graham introduces an easy, but important ratio for the more low-risk, defensive investor. It is the Earnings/Price ratio, which is simply the same thing as the P/E, but flipped around. He uses this ratio, along with the rate of high quality (AA) corporate bonds to do a simple valuation to see if a stock is reasonably priced.

The Earnings/Price technique is primarily for either evaluating a market index, or low-growth corporations. This is because companies with a good amount of growth priced into them look overpriced when you go with Benjamin Graham's value investing techniques, including this one.

The way you use this ratio to evaluate the stock market or a single stock is to take the high-grade corporate bond yield rate, and divide that number into 100. With this result, any stock at a good value will have a P/E at least 20% lower than that number. Another way you can do this is by take the high-quality corporate bond rate, and any stock (or stock index) should have a E/P at least as large as that number. Before we try it with today's numbers, let's review the key points:

• E/P = Earnings / Price
• P/E = Price / Earnings
• E/P should be at least the amount of the high-grade corporate bond yield rate
• P/E should be no larger than 20% of the high-grade corporate bond rate divided into 100

According to BondTalk, 10 year AA-rated corporate bonds are yielding 5.54%. Divide that into 100 and you get 18.05 (rounded). 20% of that is 14.44. The current P/E ratio of the S&P 500 is 17.49, putting it near a 20% premium over what Ben Graham would call a good value. When you add this with the rich premium with Robert Shiller's S&P 500 evaluation technique, the raising amount of IPOs (Which has not been a good thing for the stock market in the past), and a lot of factors with the potential to do some decent damage, I continue to believe that the stock market will be experiencing some hurtful performance over the next 3-5 years. But, this isn't all bad news, as we should also see some great value opportunities come up with individual stocks, as we've already seen in the past month of earnings releases.

In any case, I think now would be a good time to get some extra cash in your stock account, because some opportunities may soon be presented.