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Analysts Continue to Use Wrong Benjamin Graham Formula

September 23, 2013 | About:

Benjamin Graham was Warren Buffett's professor and mentor at Columbia Business School. Buffett even named his son Howard Graham Buffett, after Graham. In the preface to Graham's book, "The Intelligent Investor," Buffett calls it "by far the best book about investing ever written."

Serenity's Benjamin Graham Screener applies Graham's 16 financial criteria to 4,500 NYSE and Nasdaq stocks to find Defensive, Enterprising and NCAV grade Graham stocks today.

Last year, we briefly saw a formula that Graham actually warned against, but is widely used as "The Benjamin Graham Formula." Today, we will look in greater depth into how this confusion came about, what Graham actually wrote and finally, some stocks that meet the more complex formulas that Graham actually did recommend.

The Wrong Intrinsic Value Formula

The formula itself is mentioned in "Chapter 11: Security Analysis for the Lay Investor" of Graham's seminal book, "The Intelligent Investor," as:

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


As shown in the scan above, Graham intended this formula to produce figures close to formal appraisals related to the valuation of growth stocks.

He then uses this formula to make the converse calculation of determining what rates of growth are anticipated by the current market price of a given stock, and then explains why such expectations are almost always unrealistic.

The Cause of the Confusion

What seems to have started the confusion is that the most commonly available edition of the book today is not the one originally written by Graham, but the new version with commentary by Jason Zweig.


In this edition, all the Foot Notes from the original book have been moved to the end of the book to make place for Zweig's commentary. For example, if we look at the same page with the formula in the original book, we see the foot note where Graham cautions against using this formula.


But in the new book, the cautionary note is now on Page 585, where no one is likely to see it.


There is also a not-so-clearly labeled warning about the use of such simplistic or predictive methods present in both editions. But again, this is given a few pages later and is easy to miss.


Given below are some of the more prominent analytic tools and websites using this wrong formula. A quick search online will bring up lots more.

1. Old School Value

2. Graham Investor

3. Fast Graphs

4. Stockopedia

Thus, what started out as a simple editing mistake seems to have snowballed into a gross distortion of fact; turning what was to be a shining example of what not to do, into the most commonly used Graham method today.

The Formulas Graham Actually Gave

The formulas Graham actually recommended are far more complex and given in "Chapter 14: Stock Selection for the Defensive Investor" and "Chapter 15: Stock Selection for the Enterprising Investor."

These formulas and their methods of application have been discussed in extreme detail in the article How To Build a Complete Benjamin Graham Portfolio.

Given below are some of the stocks meeting these more complex Graham formulas today:

Company NameHollyFrontier CorpHallador Energy CoCompania De Minas BuenaventuraGold Fields ADR
Graham Stock TypeDefensiveEnterprisingEnterprisingEnterprising
Sales$20,090.00 Million$141.32 Million$1,560.00 Million$3,530.00 Million
Current Assets$4,470.27 Million$34.86 Million$803.66 Million$3,875.50 Million
Current Liabilities$1,654.44 Million$11.05 Million$350.01 Million$2,200.60 Million
Long Term Debt$1,336.24 Million$11.40 Million$173.49 Million$1,828.80 Million
Years of Uninterrupted Dividends2041820
Years of Uninterrupted Earnings105108
Excess Earnings Growth over 10 years516%2,365.38%245.69%157.42%
Tangible Book Value$29.86$5.68$14.55$7.50
Graham Price$57.31$6.82$17.46$8.80
Current Price$41.42$6.82$11.60$4.71

: The results were arrived at by automated quantitative analysis and were not verified manually. Verify the validity of the data used - most importantly, for any recent stock splits - before making an investment decision.

About the author:

www.serenitystocks.com - 17-Point Value Investing with Benjamin Graham

Rating: 3.7/5 (6 votes)



LwC - 3 years ago    Report SPAM
I have responded to another article by this source at this URL:


IMO my critique applies to this article also. In fact, the more this source claims to be the only source correctly interpreting Graham, IMO the more ridiculous the source appears to be.

SerenityStocks - 3 years ago    Report SPAM
You have been responded to at the same location, LwC.

Thank you.
Jae Jun
Jae Jun premium member - 3 years ago

Awesome. Old School Value is linked as #1 :)

I believe you are missing the important and big picture with this.

The main point you bring up was answered by Graham in your screen capture already.

"Note that we do not suggest that this formula gives the "true value" of a growth stock, but only that it approximates the results of the more elaborate calculations in vogue."

Emphasis added. Valuation is all about approximation. Graham never said, "never use this formula for valuation". He said it is an approximation. That's the same for DCF, Katsenelsons method of valuing stocks, Buffett's way of using EBIT as an approximation.

The important thing is to understand the valuation context.

SerenityStocks - 2 years ago    Report SPAM

Hello Jae Jun,

Thank you for your comment!
Your position is understandable since you run an investment tool based on this formula.

Graham gives these warnings with this formula:
1. "Warning: This material is supplied for illustrative purposes only".
2. "Note that we do not suggest that this formula gives the “true value” of a growth stock".
3. "Let the reader not be misled into thinking that such projections have any high degree of reliability".

On the other hand, he unequivocally recommends the methods in the unmistakably named "Stock Selection" chapters. They are discussed here:

Both articles have references, page numbers and scans of the relevant pages.
Readers can decide for themselves what Graham recommended, and what he warned against.

Thank you.

Please leave your comment:

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