In around two minutes you will know what is Benjamin Graham's Formula. You will get both professional definition and easy explanation. No intro, no outro, straight to the point.
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Benjamin Graham’s Formula is a formula that attempts to find the value of a stock. Benjamin Graham’s Formula should not be confused with the Graham’s Number. And if you are not sure what Graham’s Number means, feel free to watch my previous video.
Benjamin Graham’s Original Formula is V = EPS x (8.5 + 2g). Where V is the value of a stock, EPS is earnings per share of a company, 8.5 is the assumed P/E ratio of a non-growth company, and g is reasonably expected 7 to 10 years growth rate.
But later this formula has been revised due to an assumption that one of the biggest contributing factor to the values of stocks have been interest rates. That is why they should also be included in the formula.
That is why updated formula looks as following. V = EPS x (8.5 + 2g) x 4.4 divided by Y. 4.4 and Y are new components of the formula. And 4.4 represents average yield of AAA corporate bonds in 1962, while Y is the current yield of AAA corporate bonds.
A lot has changed since 1960s, therefore some investors might consider this formula old fashioned. But it might still provide some insight about where the price of a stock should approximately be.
Remember one thing. Every intrinsic value calculation gives you only approximate results. Meaning that every number you get is just a theoretical price that a stock should be at, assuming the market follows any sort of logic.
But as we all know; the stock market is irrational. Therefore, any predictions and assumptions are just educated guesses. Never anticipate that a stock ever reaches its intrinsic value. Instead, use it as a guidance while determining whether a company is under or overvalued.
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*None of this is meant to be construed as investment advice, it's for entertainment purposes only. Links above include affiliate commission or referrals. I'm part of an affiliate network and I receive compensation from partnering websites. The video is accurate as of the posting date but may not be accurate in the future.
