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Welcome to the Graham Formula
If you haven’t read The Intelligent Investor, you are missing out on timeless advice. One of which is to buy at a great margin of safety. I won’t be going through the details of the book, but an explanation of the Graham Formula and how to use it is explained in the article titled Graham Formula Stock Valuation tutorial.
Instead, I’ve applied Benjamin Graham’s formula to a free Graham Formula spreadsheet that will allow you to quickly value the intrinsic value of a company the Benjamin Graham way.
There are a couple of sites that already do this online, but I wanted something where I have control and be able to make adjustments.
A quick quote to start things off.
Confronted with a like challenge to distill the secret of sound investment into three words, we venture the following motto, Margin of Safety. – Benjamin Graham
The Benjamin Graham Formula Overview
Ben Graham formula is as follows:
Intrinsic Value = (EPS x (8.5+2g) x 4.4)/(20yr Corp Bond)
– EPS refers to earnings over a period of years and not just the previous or current year. Use a normalized version.
– 8.5 is the PE of a company with no growth.
– g is growth rate of the expected earnings. In the premium stock value spreadsheet, growth rate is user defined. Check out a method to determine growth rate.
– Back when Graham wrote the book, he was using a 20 yr AAA corp bond rate of 4.4%. To apply the formula today, we need to normalize it to today’s rate. I like to use the 20yr AA corp bond rate as the denominator since the AA rate is slightly higher than the AAA and will give a slightly conservative number.
However, I use a very slight modification to this formula which I detail in an article I wrote titled “How to Value a Stock with the Ben Graham Formula”.
How the Expected Earnings in the Graham’s Formula was Calculated
A difficulty I had was to figure out how to come up with a reasonable future EPS guide.
Here is how I calculated the future EPS. Note, I am a conservative guy. If you feel, the ranges are incorrect, try changing some things yourself.
- For the 1st future year, I took the constant at which the EPS had linearly increased over 10 years
- I added the constant to the average increase of EPS throughout the past 10 years
- I then added an additional “growth sum” to the number I get from step 2
- For the 2nd future year, I took the constant
- Added it to the 1st future year
- Added the “growth sum”
- And so on
How to Download the Free Graham Formula Spreadsheet
To download the free Graham’s Formula spreadsheet, simply enter your email in the form at the bottom of the page. Once you have entered your email, you will automatically receive, not just the Graham formula spreadsheet but eight more spreadsheets for your own use. You will also be able to get articles such as this directly to your inbox.
How To Use The Free Spreadsheet
I’ve tried to make it as user friendly simple to understand.
The spreadsheet requires manual inputs for the required data.
Follow the instructions in the spreadsheet to use it properly.
Premium Stock Valuation Spreadsheets
Feel free to check out this free version and then when ready, go to the stock valuation software page and review what you will get with the premium.
The premium version includes several valuation models as well as fundamental analysis data, historical data, charts and competitor comparison features. Just by entering one ticker, you can immediately get all that information on your favorite stock which will save you hours in your analysis.
Free Benjamin Graham Formula Spreadsheet Screenshot
Additional links to resources