Contuining to study the first lecture:
One way of expressing the principle of continuity in concrete terms would be as follows: When you look at the stock market as a whole, you will find from experience that after it has advanced a good deal it not only goes down -- that is obvious -- but it goes down to levels substantially below earlier high levels. Hence it has always been possible to buy stocks at lower prices than the highest of previous moves, not of the current move. That means, in short, that the investor who says he does not wish to buy securities at high levels, because they don't appeal to him on a historical basis or on an analytical basis, can point to past experience to warrant the assumption that he will have an opportunity to buy them at lower prices -- not only lower than current high prices, but lower than previous high levels. In sum, therefore, you can take previous high levels, if you wish, as a measure of the danger point in the stock market for investors, and I think you will find that past experience would bear you out using this as a practical guide. Thus, if you look at this chart of the Dow Jones Industrial Average, you can see there has never been a time in which the price level has broken out, in a once-for-all or permanent way, from its past area of fluctuations. That is the thing I have been trying to point out in the last few minutes.
Another way of illustrating the principle of continuity is by looking at the long-term earnings of the Dow-Jones Industrial Average. We have figures here running back to 1915, which is more than thirty years, and it is extraordinary to see the persistence with which the earnings of the Dow-Jones Industrial Average return to a figure of about $10 per unit. It is true that they got away from it repeatedly. In 1917, for example, they got up to $22 a unit; but in 1921 they earned nothing. And a few years later they were back to $10. In 1915 the earnings of the unit were $10.59; in 1945 they were practically the same. All of the changes in between appear to have been merely of fluctuations around the central figure. So much for this idea of continuity?
Whoa, this is an interesting observation. So what Graham seems to be saying about continuity is that the DJIA was trading within a certain range and never broke out. It is important to note that Graham was making this lecture around 1945. Taking a look at the chart for the DJIA: http://finance.yahoo.com/q/bc?s=%5EDJI&t=my
We can see from this chart that his observation was true for what had come before. One could observe that the DJIA had indeed traded within a narrow range up until the mid-forties. However, if we look at what history showed us afterwords, we can see that the long-term trend was certainly upwards.
So was Graham wrong? Did he simply not have enough data to make the proper conclusion yet? Am I misunderstanding what he means by "continuity"?