# 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 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.

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)

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)

Benjamin Graham is often referred to as “the father of investing” – and for good reason. Warren Buffett was one of Graham’s students at Columbia University (and the only one to have ever received an A in his class). Many other value investing legends, like Bill Ruane, Irving Kahn, and Walter Schloss, were also disciples of Benjamin Graham.

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.

Valuation is, of course, fundamental to investing. Knowing what an asset is worth and the drivers of value is a pre-requisite for intelligent investing (as opposed to speculation). In general, there are two basic methods for valuing stocks. One approach is relative valuation, which compares a stock's valuation level based on multiples like the Price Earnings ratio with those of other stocks (known as 'comparable companies') or versus the company's own historical valuation levels. The alternative approach is absolute, or intrinsic, valuation.

Valuation is, of course, fundamental to investing. Knowing what an asset is worth and the drivers of value is a pre-requisite for intelligent investing (as opposed to speculation). In general, there are two basic methods for valuing stocks. One approach is relative valuation, which compares a stock's valuation level based on multiples like the Price Earnings ratio with those of other stocks (known as 'comparable companies') or versus the company's own historical valuation levels. The alternative approach is absolute, or intrinsic, valuation.

By

By BubbleBustInvesting:As the father of modern fundamental analysis, Columbia Professor Benjamin Graham outlined in the Securities Analysis (with David Dodd) and The Intelligent Investor, the valuation of a corporation begins with its intrinsic value: the value of the company as it is determined by the value of its asset, management, and prospects, most notably, the stream of earnings it is expected to generate-the source of cash flow, retained earnings, and dividends tha

## 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.