Benjamin Graham, the godfather of value investing and Warren Buffett's mentor, has a secret formula on value investing.
The Graham Number:
Fair Value of a Stock = Square Root of (22.5) x (Earnings Per Share) x (Book Value Per Share)
The math of the Graham number is relatively straightforward. Graham believed that the price-to-earnings (P/EPS) ratio should be no more than 15. He also believed that the price-to-book value (P/BVPS) ratio should be no more than 1.5.
From that, Graham proposed that -- as a rule of thumb -- the product of the two should not be more than 22.5. In other words, (P/EPS of 15) x (P/BVPS of 1.5) = 22.5.
Read more on Graham Number here.
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