# Benjamin Graham’s Valuation Formula for Growth Stocks

Those of you grappling with perhaps the most difficult investing challenge of all, valuation, might be interested to know of a simple formula Benjamin Graham articulated in quot;The Intelligent Investorquot; for the valuation of growth stocks. In his words: “Our study of the various methods has led us to suggest a foreshortened and quite simple formula for the evaluation of growth stocks, which is intended to produce figures fairly close to those resulting from the more refined mathematical calculations.”

The initial formula as described by Graham was as follows: Intrinsic Value = EPS * (8.5 + 2g). In this case, g represents the expected annual growth “over the next seven to ten years”. 8.5x was therefore Graham’s effective base P/E for a no-growth company.

This formula however took no account of prevailing interest rates. He revised his formula in 1974 as follows: Intrinsic Value = EPS * (8.5 + 2g) * 4.4 / Y where Y was the current yield on 20 year AAA corporate bonds. The current yield on US AAA corporate bonds is 4.35%, as you can see on Yahoo Finance.

Is the Graham Formula Useful?

With this Moneychimp simulator (here), you can compare the fair value given by a two-stage...

- Original article
- Login or register to post comments

## Related

Those of you grappling with perhaps the most difficult investing challenge of all, valuation, might be interested to know of a simple formula Benjamin Graham articulated in quot;The Intelligent Investorquot; for the valuation ofgrowth stocks.

ByHarlan Kessler:Investors are constantly looking for a way to value companies. One such method is an intrinsic value formula proposed by Benjamin Graham commonly known as the Benjamin Graham Formula. The formula was discussed in Graham's book The Intelligent Investor and described in the 1962 edition of Security Analysis as a way for investors to quickly determine the a fair range of values for their stocks.

By Osman Gulseven:Known as the father of value investment, Benjamin Graham was an economist and a professional investor. Warren Buffett states that Graham is the second most influential person in his life after his father. Graham is famous for his simple yet powerful estimation rules. In his famous book Intelligent Investor (1973), Graham describes his valuation method as such: Long Term Valuation = EPS x (8.5 + 2 x Estimated Earnings Growth)

Osman Gulseven submits: Known as the father of value investment, Benjamin Graham was an economist and a professional investor. Warren Buffett states that Graham is the second most influential person in his life after his father. Benjamin Graham is famous for his simple yet powerful estimation rules. In his famous book, Intelligent Investor (1973), Graham describes his valuation method as such: Long Term Valuation = EPS x (8.5 + 2 x Estimated Earnings Growth)

Osman Gulseven submits: Known as the father of value investment, Benjamin Graham was an economist and a professional investor. Warren Buffett states that Graham is the second most influential person in his life after his father. Benjamin Graham is famous for his simple yet powerful estimation rules. In his famous book, Security Analysis (1962), Graham describes his valuation method as such: Long Term Valuation = EPS x (8.5 + 2 x Estimated Earnings Growth)

By John Alford:In the "Intelligent Investor" Benjamin Graham lays out the case for being a defensive investor or an enterprising investor. He goes on to lay out guidelines and analysis techniques an investor can use to make investment decisions. One of these comes in chapter 11 where he discusses basic security analysis without rewriting his tome on security analysis.

From Goldman's Fracnesco Garzarelli: Trade Update: Closing our 2013 Top Trade recommendation to go Long 5-year Spanish Government Bonds, for a potential 5.5% total period return We recommend closing long positions in 5-year Spanish bonds, one of our Top Trade recommendations for 2013. Since inception on 6 December, the position would have returned 5.5%.

By Jatin D. Shah: Benjamin Graham is widely considered as the father of modern value investing. Warren Buffett states that Graham is the second most influential person in his life after his father. In his classic, The Intelligent Investor , Graham suggests that an enterprising investor should consider purchasing a diversified portfolio of “bargain stocks”.

Chuck Carnevale submits:Ben Graham’s famed formula for valuing a stock works in the real world!V* = EPS x (8.5 + 2g)Ten Real World examples of companies growing between zero and 5% These ten examples are based on our article: "A primer on valuation: Testing the Wisdom of Ben Graham's Formula" (part one) published on 2/08/2011. These represent just a few examples of many we could provide. Ben’s formula works because it is sound.

Kurtis Hemmerling submits: I wanted to write a stock screen as homage to one of the founding fathers of value investing, Benjamin Graham. Most know him for his books, "Security Analysis," "The Intelligent Investor," or his depiction of Mr. Market that offers you stock on your doorstep every day.

## Comments

## misquoted

Graham never intended that growth formula to actually be used to evaluate stocks. This is a very common but dangerous misconception. See http://www.anahin.net/misquoted for a scan of the original edition of the concerned page with a footnote and a warning about this formula.