"The Intelligent Investor" - Timeless Value Investing Formulas
The Graham Number represents the maximum price an investor should pay for a stock based on its earnings and book value. It combines both profitability (EPS) and asset backing (book value) into a single valuation metric.
Use this when: You want a quick screening tool to identify potentially undervalued stocks. If a stock trades below its Graham Number, it may be worth further investigation.
Why it works: Graham believed that a stock should trade at no more than 15 times earnings AND 1.5 times book value. This formula combines both criteria (15 × 1.5 = 22.5).
This formula determines the maximum price-to-earnings ratio you should pay for a stock based on its expected growth rate. It prevents overpaying for growth stocks.
Use this when: Evaluating growth stocks or any company with predictable earnings growth. Compare the calculated maximum P/E with the current P/E ratio.
Why it works: Higher growth rates justify higher P/E ratios, but Graham provided a mathematical limit to prevent speculation and overpayment.
NCAV represents the liquidation value of a company - what shareholders would receive if the company were liquidated today. Graham looked for stocks trading below 2/3 of their NCAV.
Use this when: Looking for deeply undervalued stocks, especially during market downturns. This is Graham's "cigar butt" approach - buying companies so cheap they're almost being given away.
Why it works: You're buying below liquidation value, providing enormous downside protection. Even if the business fails, you could theoretically recover your investment.
Graham's conservative approach to balancing stocks and bonds based on age. Younger investors can handle more stock market volatility, while older investors need more stability.
Use this when: Setting up your initial investment portfolio or rebalancing periodically. It provides a simple, time-tested framework for asset allocation.
Why it works: Balances growth potential with risk management. As you age and have less time to recover from market downturns, you gradually shift to more conservative investments.
Graham's complete screening criteria for defensive (conservative) investors. A stock should meet ALL these criteria to qualify as a defensive investment.
Use this when: You prefer conservative, low-risk investments with steady returns. Perfect for investors who don't want to actively analyze individual companies.
Why it works: These criteria filter for financially stable companies trading at reasonable prices, reducing both business risk and market risk.
This measures how much working capital (short-term financial health) each share represents. It indicates the company's ability to meet short-term obligations and fund operations.
Use this when: Analyzing the financial strength and liquidity of a company. Compare this to the stock price to see if you're getting good value for the company's liquid assets.
Why it works: Companies with high working capital per share relative to stock price are less likely to face financial distress and may be undervalued.