“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.
Investment Mistake #1: Don’t Place Excessive Trust in “Experts” Everybody has a conflict of interest with your wealth except you. Investment institutions manage your money so they can charge fees, and financial advisors sell you products so they can earn commissions. Similarly, the investment media seeks to maximize subscription and advertising revenue thus biasing editorial policy toward sizzle […]
Companies whose earnings tend to fluctuate sharply with their business cycles are issuers of cyclical stocks. When business conditions are good, a cyclical company’s profitability tends to be high and the price of its common stock tends to rise. When conditions deteriorate, the company’s sales and profits often fall sharply and/or rapidly. The timing of an […]
The very inefficiency of the trading markets in many emerging markets (lack of liquidity, large bid – ask spreads, high transaction costs) makes a high – turnover, active management investment strategy inadvisable. Indexing has even worked well in markets such as China, where there have apparently been many past instances of market manipulation. Please follow and […]