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Author: zarley00 Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 18386  
Subject: Re: Ben Graham's Equation Date: 10/31/2001 8:35 PM
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As Snoop and Howard pointed out, there are huge variations in intrinsic value that are dictated by the assumptions of any DCF analysis. Your goal is to do a better job at it than others.


Amen brother!

I can't offer a citation, but I could swear that Graham's formula was his attempt to estimate the PE that an investor might expect to see for a solid growing company, and was not actually a shortcut to intrinsic value.


I would have sworn the same thing, but when I took out my copy of The Intelligent Investor I found this on page 158 (Chapter 11):

Value = Current (Normal) Earnings X (8.5 plus twice the expected annual growth rate)

Some thoughts:
- No comment about PE (looking at per share value)
- Normal earnings were defined as an average of three years earnings, not just the last year's
- No comment about the risk free rates, which makes me think TMF may have gotten their formula from another source, or I'm missing something.
- Further on he comments about expected growth rates. Interestingly he's looking at growth around 7-8% as extended term rates of growth. Much lower than what most here would deem acceptable. Also making the 19% used in the RM article today seem outlandish.

One final point. I like to look at a range of future growth rates to see the resulting range of potential intrinsic values. Perhaps this would be instructive with the example of Pfizer. I think if you bring those expected growth rates down to more reasonable levels, for a company the size of Pfizer, you'll get a better estimate of its possible value.

Zarley
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