Graham Number: A Guide To Value Investing Strategies

The Graham Number is a formula used in securities investing to measure a stock's intrinsic value. It was developed by Benjamin Graham, who is widely considered the father of value investing. The formula takes into account a company's earnings per share (EPS) and book value per share (BVPS) to determine the maximum price a defensive investor should pay for a stock. The Graham Number is calculated as the square root of 22.5 multiplied by EPS and BVPS. This results in a value that investors can use to assess whether a stock is undervalued, fairly valued, or overvalued. While the Graham Number provides a quick and easy way to estimate a stock's value, it has limitations and should be used in conjunction with other valuation methods and fundamental analysis.

The Graham Number is the upper bound of the price range that a defensive investor should pay for a stock

The Graham Number is a figure used in securities investing that measures a stock's fundamental value or so-called fair value. It was developed by Benjamin Graham, the founder of value investing and Warren Buffett's mentor. The Graham Number is calculated using a company's earnings and book value, both on a per-share basis. The formula for the Graham Number is:

> sqrt(22.5 x (earnings per share) x (book value per share))

The final number is the maximum price that a defensive investor should pay for a stock. In other words, a stock priced below the Graham Number is considered undervalued and worth investing in.

The Graham Number is derived from two of Graham's rules for defensive stocks:

• The current price should not be more than 15 times the average earnings of the past three years.
• The current price should not be more than 1.5 times the book value.

The number 22.5 in the formula is included to account for Graham's belief that the price-to-earnings (P/E) ratio should not be over 15 and the price-to-book ratio should not be over 1.5 (15 x 1.5 = 22.5).

The Graham Number is a conservative formula and should be put into context. It is one of several criteria that should be considered when evaluating stocks. Other criteria for defensive stocks include:

• Seek safety with large, predictable companies with at least $465 million in sales (adjusted for inflation).
• Strong financial condition with long-term debt less than working capital.
• Earnings stability with no losses over the past 10 years.
• Consistent dividends without problems for the past 20 years.
• Net income per share should have increased by at least one-third in the past 10 years.

The Graham Number is a useful tool for investors to assess the intrinsic value of a stock and determine if it is worth investing in. However, it has limitations and does not include growth assumptions or consider fundamental characteristics such as management quality and industry characteristics.

The number is arrived at using a company's earnings and book value, both on a per-share basis

The Graham number, or Benjamin Graham's number, is a tool used in securities investing to measure a stock's fair value. It is named after Benjamin Graham, the "father of value investing". The Graham number is calculated using a company's earnings and book value, both on a per-share basis.

The formula for the Graham number is:

> Graham Number = √(22.5 × EPS × BVPS)

Here, EPS stands for Earnings Per Share and BVPS stands for Book Value Per Share.

To calculate EPS, you divide a company's net profit by the number of outstanding shares of its common stock. For BVPS, you divide the ratio of equity available to common shareholders by the number of outstanding shares.

The Graham number is a conservative estimate of the maximum price that a defensive investor should pay for a stock. According to Benjamin Graham, a defensive investor is someone who is unwilling or unable to put time or effort into their investment decisions and primarily seeks to avoid serious mistakes or losses.

The Graham number is based on Graham's belief that the price-to-earnings (P/E) ratio should not be more than 15 times the earnings, and the price-to-book (P/B) ratio should not exceed 1.5 times the book value. This is reflected in the formula, where 22.5 is simply the product of 15 and 1.5.

By taking into account both earnings and asset value, the Graham number provides a more comprehensive estimate of a stock's intrinsic value than using either metric alone. It is a useful tool for defensive investors to quickly identify undervalued stocks that meet Graham's criteria for defensive investing.

However, it's important to note that the Graham number has some limitations. It relies on positive earnings and book value, making it unsuitable for companies with negative earnings or book values. It also does not factor in a company's growth prospects, which can lead to undervaluing rapidly growing businesses.

The Graham Number is named after Benjamin Graham, the father of value investing

The Graham Number is a value investing formula named after its creator, Benjamin Graham, who is widely regarded as the "father of value investing". Graham was a British-born American financial analyst, economist, accountant, investor, and professor. He laid the groundwork for value investing at mutual funds, hedge funds, and other investment vehicles.

Graham's philosophy was to closely examine a company's financial statements to identify undervalued opportunities. He stressed the importance of distinguishing the price of a stock from the value of its underlying business. His famous book, "The Intelligent Investor", is considered the bible of value investing and introduced the world to the concept of value investing. The book also features a character known as Mr. Market, Graham's metaphor for the mechanics of market prices.

The Graham Number is a specific application of Graham's overall value investing philosophy. It is used as a general test to identify stocks that are currently selling for a good price. The number represents the upper bound of the price range that a defensive investor should pay for a stock. According to the theory, any stock price below the Graham Number is considered undervalued and thus worth investing in.

The Graham Number is calculated using a company's earnings and book value, both on a per-share basis. The number is normalized by a factor of 22.5, which represents Graham's belief that the price-to-earnings (P/E) ratio should not be over 15x and the price-to-book ratio should not be over 1.5x (thus, 15 x 1.5 = 22.5).

The formula for the Graham Number is:

> √(22.5 x EPS x BVPS)

Where:

• EPS = earnings per share
• BVPS = book value per share

The Graham Number is a metric to determine the highest price an investor should pay for a particular stock

The Graham Number is a metric used to determine the highest price an investor should pay for a particular stock. It was developed by Benjamin Graham, the "father of value investing" and mentor to Warren Buffett. The Graham Number is calculated using a company's earnings and book value, both on a per-share basis. The formula for the Graham Number is:

> √[22.5 x EPS x BVPS]

Where:

• EPS = earnings per share = net income/shares outstanding
• BVPS = book value per share = shareholders' equity/shares outstanding

The number 22.5 is included in the calculation to represent an 'ideal' price-to-earnings (P/E) ratio of no more than 15x and a price-to-book (P/B) ratio of no more than 1.5x (15 x 1.5 = 22.5). According to Graham, the current price of a stock should not be more than 1 1/2 times the book value last reported.

For example, if the earning per share for a single share of company ABC is $1.50, and the book value per share is $10, the Graham number would be 18.37. $18.37 is the maximum price an investor should pay for a share of ABC, according to Graham. If ABC is priced at $16, it is considered attractive; if priced at $19, it should be avoided.

The Graham Number is designed to assess stocks regardless of sector. However, it does have some limitations. The calculation leaves out many fundamental characteristics that comprise a good investment, such as management quality, major shareholders, industry characteristics, and the competitive landscape. It also does not work well for growing companies, as it does not include any growth assumptions.

The Graham Number is a conservative formula, so it's important to put it into context

The formula was created by Benjamin Graham, the "father of value investing" and Warren Buffett's mentor. It is a metric to determine the highest price that an investor should pay for a particular stock. It is a normalised value, based on a recommended upward limit for value investors of a price-to-earnings (P/E) ratio of no more than 15x and a price-to-book (P/B) ratio of no more than 1.5x. The formula is:

> √(22.5 x EPS x BVPS)

Where:

• EPS = earnings per share
• BVPS = book value per share

The Graham Number is designed to be used by defensive investors, i.e. passive investors looking for solid companies for long-term appreciation. It is not suitable for investing in growing companies.

Defensive investors should also consider the following criteria when selecting stocks:

• Seek safety with large, predictable companies. Look for stocks with at least $465 million in sales (adjusted for inflation from $100 million in the 1970s).
• Strong financial condition to prevent bankruptcy: long-term debt should be less than working capital.
• Earnings stability: no losses over the past 10 years.
• Consistent dividends: the company should have a history of paying dividends without problems for the past 20 years. Net income per share should have increased by at least a third in the past 10 years.
• P/E ratio below 15.
• P/B ratio below 1.5.

The Graham Number is just one of many tools that can be used to value stocks. It is important to take things into context and not to try to apply the same criteria to every stock.

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