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
Ben Graham formula is as follows:
- 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”.
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.
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.
I’ve tried to make it as user friendly simple to understand.
In order to get it working though, you MUST install the plugin for excel which is described in the spreadsheet. It is a free plugin that allows excel to automatically retrieve financial data from the internet.
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.
Additional links to resources