After re-reading Been Graham's thoughts on margin of safety, I naturally wanted to look at today's market. He mentions that one measure of that margin is a company's earnings yield over it's debt payment (ie, a 9% yield vs 4% rate would be comfortable).
Would it be acceptable to use the CAPE multiple and inverse it to get the earnings yield and then compare that to 10 year corporate bond rates? The CAPE currently has a yield of about 3.5% while the 10 year corporate bond yield is roughly 4.3% (according to St Louis Fed). This results in a negative margin of safety.
Are these numbers acceptable to use? Should I not use the CAPE yield and instead use the current S&P yield (currently a little over 5%)?
What metrics do you use to measure a margin of safety in your investments or in the market as a whole?
Hedge Fund Interview Course
- 814 questions across 165 hedge funds. Crowdsourced from over 500,000 members.
- 11 Detailed Sample Pitches and 10+ hours of video.
- Trusted by over 1,000 aspiring hedge fund professionals just like you.