# 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.

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)

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.

Submitted by Lance Roberts via STA Wealth Management, A High-Yield Warning With Janet Yellen recently warning about overvaluation in the bond market, I thought it would be important to look at potentially one of the single most overvalued areas in that market - high yield. To wit:

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.

ByJon Parepoynt:There is a widely respected formula for calculating the intrinsic value of a stock. It is known as the Graham Number and is pretty simple. The formula is Graham Number = Square Root of (Book Value * EPS * 22.5). With the advent of the excel spreadsheet, the old fashion abacas is no longer needed to do the calculation.From Forbes:

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)

Chuck Carnevale submits:As 2011 begins, the growing legion of investors seeking retirement income is faced with the same conundrum they faced in 2010. Interest rates remain at near all-time lows, and severely limit attractive investment options to meet income needs. After being traumatized by the great recession of 2008, safety and risk aversion are of the highest priority.

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.