Message Font: Serif | Sans-Serif
 
UnThreaded | Threaded | Whole Thread (48) | Ignore Thread Prev Thread | Prev | Next | Next Thread
Author: hsifyllej Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 18386  
Subject: Ben Graham's Equation Date: 10/31/2001 3:16 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 11
Today's Rule Maker column is about Graham's equation: http://www.fool.com/portfolios/rulemaker/2001/rulemaker011031.htm I quoute:

In The Intelligent Investor, Graham laid out an equation that was designed to help people value a growth company. The equation goes like this:
P = ProjEPS * (8.5 + (2*G)) * (4.4/AAA yield)


I would strongly recommend against using this equation which is little more useful than the PEG ratio. Like the PEG=1 rule it's ad hoc and doesn't account for risk and book value, two key components of valuation. Graham is from a time when the world looked a lot different than today. In the context of valuation you might say that in Graham's time the earth was thought to be flat. There's been a revolution in the field of valuation since which brings us to another quote from today's Rule Maker article:

I started today with Graham's equation, but we can't stop there. Discounted cash flow analysis is out there, along with other concepts such as "real options" that we need to consider.

You can start and stop with discounted cash flow analysis, or any other variant of the dividend-discount model, which is the correct way to value stocks. Real options are often abused here and elsewhere as a residual value generator, i.e. if a company is overvalued relative to formal valuation analysis but we are in love with the company it must have real option value making up for the difference and more.

Datasnooper.
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Print the post  
UnThreaded | Threaded | Whole Thread (48) | Ignore Thread Prev Thread | Prev | Next | Next Thread

Announcements

Foolanthropy 2014!
By working with young, first-time moms, Nurse-Family Partnership is able to truly change lives – for generations to come.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Post of the Day:
Macro Economics

Looking at Currency Ratios
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and "#1 Media Company to Work For" (BusinessInsider 2011)! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.
Advertisement