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FINANCIAL CHRONICLE™ » EXPERT CHRONICLE™ » The Graham Number

The Graham Number

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sriranga


Co-Admin
The Graham number or Benjamin Graham number is a figure used in securities investing that measures a stock's so-called fair value. Named after Benjamin Graham, the founder of value investing, the Graham Number can be calculated as follows:

The Graham Number - Page 3 D5b77410

Alternative calculation
Earnings per share is calculated by dividing net income by shares outstanding. Book value is another way of saying shareholders' equity. Therefore, book value per share is calculated by dividing equity by shares outstanding. Consequently, the formula for the Graham number can also be written as follows:

The Graham Number - Page 3 Ben10


This is one of the ways to estimate the intrinsic value of business based on their book value and their earnings power.

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.

In general, the Graham number is a very conservative way of valuing a stock. It cannot be applied to companies with negative book values.

Graham value is applicable only to the companies that have positive earnings and positive tangible book value.

The final number is, theoretically, the maximum price that a defensive investor should pay for the given stock.Put another way, a stock priced below the Graham Number would be considered a good value, if it also meet a number of other criteria.

The complete Graham selection procedure is much more elaborate. No decision should be made based on this number alone.

When applying any of those valuation methods, you need to be aware of their limitations. Please keep these in mind:

1. Graham Number does not take growth into account. Therefore it underestimates the values of the companies that have good earnings growth. We feel that if the earnings per share grows more than 10% a year, Graham Number underestimates the value.

2. Graham Number punishes the companies that have temporarily low earnings. Therefore, an average of earnings makes more sense in the calculation of Graham Number.

3. Graham Numbers underestimates companies that are light with book.

Source: Edited articles from Wikipedia and http://www.forbes.com

http://sharemarket-srilanka.blogspot.co.uk/
Share this post on: redditgoogle

Post Fri Oct 03, 2014 9:14 am by NC

Colo - 315 affraid
Glas - 5
wata - 40
Vfin - 64
Sdb - 226
Namu - 134
Kapi - 98.5

Some of my favourites (except, lioc, tjl...)
However, I think we should also think about the liquidity factor also....
If its liquid and below fair value I think it Superb.. Very Happy

Post Thu Oct 09, 2014 7:32 pm by SHARK aka TAH

Benjamin Graham (1894-1976) is considered by many to be the architect of Fundamental Analysis and Value Investing. Graham liked to find discrepancies between a stock’s price and its value and would buy large portfolios of undervalued stocks, holding them until they became fully valued. In his 1949 book “The Intelligent Investor, Graham describes a stock selection technique that identifies stocks that are trading at a deep discount to a calculated value termed the Net Current Asset Value or NCAV.

Calculation of a stock’s NCAV is a fairly simple endeavor and is somewhat different from the calculation of Book Value. Whereas Book Value is purely a per share measure of Assets – Liabilities, the NCAV is a little more rigorous. In calculating NCAV, Graham only considered Current Assets, i.e. cash, cash equivalents, accounts receivable, inventories. However, from this value he still subtracted Total Liabilities. The result would then be divided by the number of shares outstanding to give the NCAV per share. This value would be considered by Graham to be a fair value for the stock.
You might think he would buy at this price, but no. In most cases, Graham only bought stocks that were trading under two-thirds or 66% of their NCAV. Experience has shown that it is safe to buy stocks up to 120% of NCAV and still make a profit.
Consider as an example G-III Apparel Group Ltd, ticker symbol GIII.
Current Assets are $130.25M, Total Liabilities are $68.3M, and there are 7.22M shares outstanding.
NCAV = (130.25 – 68.3) / 7.22 = $8.58. Two-thirds of this price would be $5.66.
At the time of writing (03/07/05), GIII is trading at $7.67, so may not be a buy candidate at present, in Graham’s view although it would be acceptable if you are considering stocks up to 120% of NCAV.
It is important to note that Graham would consider the NCAV to be a first step in further analysis of the stock. A sensible investor would investigate the balance sheet further to check for a sound business with other desirable factors such as good earnings,revenue growth, low debt-to-equity, and good operational cash flow per share.
Stocks trading at such a deep discount are few and far between, and have usually been beaten down by a combination of bad news and emotional reactions from the investing public. These stocks were Graham’s bread and butter. He repeatedly insisted that the time to buy stocks was when everyone else was selling and the time to sell was when everyone else was buying. Had he been alive, he certainly would have been out of stocks before the dot com bubble burst and would surely have been picking up bargains soon after. It is no secret that one of Graham’s most famous disciples is Warren Buffett who has consistently beaten the market by a large margin with his investments.
One study has shown that Graham’s NCAV strategy works well; in this particular study, portfolios picked using the strategy at the beginning of each year between 1970 and 1983 would have returned an average annual gain of over 29% when held for only the duration of each year in this 13 year period.
Van Tharp mentions an actual investing strategy based on the NCAV or Graham’s Number as it is sometimes called, in his book “Safe Strategies for Financial Freedom”. The strategy as mentioned by Tharp involves buying stocks at two-thirds of their NCAV, and selling a third of your holding when a 50% profit is achieved. If the price continues upwards to 100% profit, you sell a number of shares to make up half your original holding.

You now have your original investment back and have a holding of “free” shares. This strategy can be performed in an IRA using a large portfolio of perhaps 30 similarly undervalued stocks. If the market has been declining for several months, there will be several such stocks to choose from. In an up trending market, however, it will be much harder to find good value candidates but diligent investors who do their homework will more often than not be well rewarded for their efforts.

Note: Graham’s Number is inappropriate and irrelevant for the majority of medium to large cap stocks; use it with discretion, in particular for checking/tracking stocks that have appeared on the NCAV Screen.

Update: G-III Apparel went on to hit a high of $26.74 in Feb 2007.

Post Thu Oct 09, 2014 7:38 pm by SHARK aka TAH

Below is the link for the above article Very Happy
http://www.grahaminvestor.com/articles/how-to/finding-undervalued-stocks-the-grahams-number-technique/

Post Thu Oct 09, 2014 10:15 pm by g@ii

Worth reading. Thanks for the resources.. Very Happy

avatar

Post Thu Oct 09, 2014 10:25 pm by D.G.Dayaratne

NC- Expert

Pl explain greham number(NCAV) of glass is higher than NAV of glass

I check only glas given by you

Pl explain basis of calculation with an example Thanks

SHARK aka TAH

Post Fri Oct 10, 2014 7:12 am by SHARK aka TAH

I am getting a negative NCAV for Glass Very Happy

avatar

Post Fri Oct 10, 2014 7:23 am by D.G.Dayaratne

If you  all follow instructions of Graham no stock market

Any way few people can follow him and earn reasonable profit
in the long run

No risk No profit.........................................



Last edited by D.G.Dayaratne on Fri Oct 10, 2014 7:24 am; edited 1 time in total (Reason for editing : correction)

CSE1

Post Fri Oct 10, 2014 7:43 am by CSE1

@sriranga wrote:The Graham number or Benjamin Graham number is a figure used in securities investing that measures a stock's so-called fair value. Named after Benjamin Graham, the founder of value investing, the Graham Number can be calculated as follows:

The Graham Number - Page 3 D5b77410

Alternative calculation
Earnings per share is calculated by dividing net income by shares outstanding. Book value is another way of saying shareholders' equity. Therefore, book value per share is calculated by dividing equity by shares outstanding. Consequently, the formula for the Graham number can also be written as follows:

The Graham Number - Page 3 Ben10


This is one of the ways to estimate the intrinsic value of business based on their book value and their earnings power.

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.

In general, the Graham number is a very conservative way of valuing a stock. It cannot be applied to companies with negative book values.

Graham value is applicable only to the companies that have positive earnings and positive tangible book value.

The final number is, theoretically, the maximum price that a defensive investor should pay for the given stock.Put another way, a stock priced below the Graham Number would be considered a good value, if it also meet a number of other criteria.

The complete Graham selection procedure is much more elaborate. No decision should be made based on this number alone.

When applying any of those valuation methods, you need to be aware of their limitations. Please keep these in mind:

1. Graham Number does not take growth into account. Therefore it underestimates the values of the companies that have good earnings growth. We feel that if the earnings per share grows more than 10% a year, Graham Number underestimates the value.

2. Graham Number punishes the companies that have temporarily low earnings. Therefore, an average of earnings makes more sense in the calculation of Graham Number.

3. Graham Numbers underestimates companies that are light with book.

Source: Edited articles from Wikipedia and http://www.forbes.com
is this EPS is Annual EPS or Q.EPS ?

SHARK aka TAH

Post Fri Oct 10, 2014 7:57 am by SHARK aka TAH

we have to go by annualised EPS Very Happy

There is 1 share i found NCAV to be below NAV Very Happy

soyannata samabawei kiyanne Very Happy

avatar

Post Fri Oct 10, 2014 8:24 am by D.G.Dayaratne

Any way good discussion on the Grahem number.

Now this forum in not limited to BAKAPANDITHAYAS only

jonny

Post Fri Oct 10, 2014 9:41 am by jonny

@sriranga wrote:The Graham number or Benjamin Graham number is a figure used in securities investing that measures a stock's so-called fair value. Named after Benjamin Graham, the founder of value investing, the Graham Number can be calculated as follows:

The Graham Number - Page 3 D5b77410

Alternative calculation
Earnings per share is calculated by dividing net income by shares outstanding. Book value is another way of saying shareholders' equity. Therefore, book value per share is calculated by dividing equity by shares outstanding. Consequently, the formula for the Graham number can also be written as follows:

The Graham Number - Page 3 Ben10


This is one of the ways to estimate the intrinsic value of business based on their book value and their earnings power.

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.

In general, the Graham number is a very conservative way of valuing a stock. It cannot be applied to companies with negative book values.

Graham value is applicable only to the companies that have positive earnings and positive tangible book value.

The final number is, theoretically, the maximum price that a defensive investor should pay for the given stock.Put another way, a stock priced below the Graham Number would be considered a good value, if it also meet a number of other criteria.

The complete Graham selection procedure is much more elaborate. No decision should be made based on this number alone.

When applying any of those valuation methods, you need to be aware of their limitations. Please keep these in mind:

1. Graham Number does not take growth into account. Therefore it underestimates the values of the companies that have good earnings growth. We feel that if the earnings per share grows more than 10% a year, Graham Number underestimates the value.

2. Graham Number punishes the companies that have temporarily low earnings. Therefore, an average of earnings makes more sense in the calculation of Graham Number.

3. Graham Numbers underestimates companies that are light with book.

Source: Edited articles from Wikipedia and http://www.forbes.com

Dear Sri,

Heard after a long interval.Where were you...Welcome back..!

In above equation need to know about the above 22.5 factor.How do you arrive this value..??

Thanks/Jonny +

GroundedKestrel

Post Fri Oct 10, 2014 12:31 pm by GroundedKestrel

What about for #VPEL?

SHARK aka TAH

Post Fri Oct 10, 2014 5:22 pm by SHARK aka TAH

Hey Jonny,

Its 1.5 PBV and 15 P/E Very Happy

This is the Max one should consider as per Benjamin Graham

avatar

Post Sun Nov 22, 2020 3:04 pm by Quibit

The Ben Graham Way to find intrinsic value of a stock

සෑම ආයෝජකයෙක්ම තොගයක් මිල අධිකද, අඩු මිලක්ද, සාධාරණ මිලක්ද යන ප්‍රශ්නයට මුහුණ දෙයි. සිල්ලර ආයෝජකයින්ට මෙය තක්සේරු කිරීම සඳහා විවිධ තක්සේරු ආකෘති භාවිතා කරමින් දිගු, දැඩි ගණිතමය ගණනය කිරීම් සිදු කිරීම සාමාන්‍යයෙන් කළ නොහැකිය. ඉතින්, ඔහු කුමක් කළ යුතුද? වර්ධන කොටස්වල තක්සේරු කිරීම් සොයා ගැනීම සඳහා බෙන්ජමින් ග්‍රැහැම්ගේ සරල සූත්‍රය ගලවා ගනී.

Intrinsic value = [EPS × (8.5 + 2g) × 4.4]/Y

The Graham Number - Page 3 D85c4e10

avatar

Post Sun Nov 22, 2020 3:12 pm by Nuwancha

https://www.facebook.com/KnwHunting/

Manipulater likes this post

avatar

Post Sun Nov 22, 2020 5:33 pm by samaritan

There is another model to value shares known as 'Dividend discount model'. 

I have given the link below for illustration.

[url=https://www.moneycrashers.com/dividend-discount-valuation-model/#:~:text=Example of the Dividend Discount,then 3% each year thereafter.]https://www.moneycrashers.com/dividend-discount-valuation-model/#:~:text=Example%20of%20the%20Dividend%20Discount,then%203%25%20each%20year%20thereafter.[/url]

CONCLUSION:

In my opinion 'The Graham Number' & 'Dividend discount model' deserve to be in the garbage bin!

avatar

Post Sun Nov 22, 2020 5:34 pm by Nandun

@Quibit wrote:The Ben Graham Way to find intrinsic value of a stock

සෑම ආයෝජකයෙක්ම තොගයක් මිල අධිකද, අඩු මිලක්ද, සාධාරණ මිලක්ද යන ප්‍රශ්නයට මුහුණ දෙයි. සිල්ලර ආයෝජකයින්ට මෙය තක්සේරු කිරීම සඳහා විවිධ තක්සේරු ආකෘති භාවිතා කරමින් දිගු, දැඩි ගණිතමය ගණනය කිරීම් සිදු කිරීම සාමාන්‍යයෙන් කළ නොහැකිය. ඉතින්, ඔහු කුමක් කළ යුතුද? වර්ධන කොටස්වල තක්සේරු කිරීම් සොයා ගැනීම සඳහා බෙන්ජමින් ග්‍රැහැම්ගේ සරල සූත්‍රය ගලවා ගනී.

Intrinsic value = [EPS × (8.5 + 2g) × 4.4]/Y

The Graham Number - Page 3 D85c4e10

How find Y?

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