“Current price should not be more than 15 times average earnings of the past three years.”-
“Current price should not be more than 1.5 times the book value last reported. However, a multiplier of earnings below 15 could justify a correspondingly higher multiplier of assets. As a rule of thumb we suggest that the product of the multiplier times the ratio of price to book value should not exceed 22.5. (This figure corresponds to 15 times earnings and 1.5 times book value. It would admit an issue selling at only 9 times earnings and 2.5 times asset value, etc.)”-
Unlike valuation methods such as DCF or Discounted Earnings, the Graham number does not take growth into the valuation. Unlike the valuation methods based on book value alone, it takes into account the earnings power. Therefore, the Graham Number is a combination of asset valuation and earnings power valuation. the Graham number is a very conservative way of valuing a stock. It cannot be applied to companies with negative book values.
To be a successful investor you need to know two things – How to Value a Business, and How to Think About Market Prices. Buffett wrote about this in his 1996 letter to shareholders. To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, option pricing or emerging markets. You may, in fact, be better off knowing […]
Warren Buffett has said, value and growth “are joined at the hip.” See growth is always a component in the calculation of the intrinsic value of a stock. Sometimes growth is enormously important to the calculation of value. Sometimes it’s not important at all. Sometimes growth positively impacts value. Sometimes growth can negatively impact value. […]
Value investing is an art. In that, it brings many different disciplines to the fore when you take this type of investing to heart. And the funny thing is that it is part of our everyday life that we use constantly. Tell me about someone who isn’t looking for a deal on something that they ed. […]