Wednesday, 5 January 2022
Quote for the day
"Investors should remember that excitement and expenses are their enemies." - Warren Buffett
Tuesday, 4 January 2022
Quote for the day
"Successful investing takes time, discipline, and patience. No matter how great the talent or effort, some things just take time: You can’t produce a baby in one month by getting nine women pregnant." - Warren Buffett
Monday, 3 January 2022
Quote for the day
"There is no such thing as overnight success or easy money. If you fail, do not be discouraged; try again. When you do well, do not change your ways. Success is not just good luck: it is a combination of hard work, good credit standing, opportunity, readiness, and timing. Success will not last if you do not take care of it." - Henry Sy
Sunday, 2 January 2022
Quote for the day
"The key to trading success is emotional discipline. If intelligence were the key, there would be a lot more people making money trading… I know this will sound like a cliche, but the single most important reason that people lose money in the financial markets is that they don’t cut their losses short." – Victor Sperandeo
Saturday, 1 January 2022
The Graham Number
The Graham number or Benjamin Graham number is a figure used in securities investing that measures a stock's so-called fair value. Named after Benjamin Graham, the founder of value investing, the Graham Number can be calculated as follows:
Alternative calculation
Earnings per share is calculated by dividing net income by shares outstanding. Book value is another way of saying shareholders' equity. Therefore, book value per share is calculated by dividing equity by shares outstanding. Consequently, the formula for the Graham number can also be written as follows:
This is one of the ways to estimate the intrinsic value of business based on their book value and their earnings power.
Unlike valuation methods such as DCF or Discounted Earnings, the Graham number does not take growth into the valuation. Unlike the valuation methods based on book value alone, it takes into account the earnings power. Therefore, the Graham Number is a combination of asset valuation and earnings power valuation.
In general, the Graham number is a very conservative way of valuing a stock. It cannot be applied to companies with negative book values.
Graham value is applicable only to the companies that have positive earnings and positive tangible book value.
The final number is, theoretically, the maximum price that a defensive investor should pay for the given stock.Put another way, a stock priced below the Graham Number would be considered a good value, if it also meet a number of other criteria.
The complete Graham selection procedure is much more elaborate. No decision should be made based on this number alone.
When applying any of those valuation methods, you need to be aware of their limitations. Please keep these in mind:
1. Graham Number does not take growth into account. Therefore it underestimates the values of the companies that have good earnings growth. We feel that if the earnings per share grows more than 10% a year, Graham Number underestimates the value.
2. Graham Number punishes the companies that have temporarily low earnings. Therefore, an average of earnings makes more sense in the calculation of Graham Number.
3. Graham Numbers underestimates companies that are light with book.
Source: Edited articles from Wikipedia and http://www.forbes.com
Alternative calculation
Earnings per share is calculated by dividing net income by shares outstanding. Book value is another way of saying shareholders' equity. Therefore, book value per share is calculated by dividing equity by shares outstanding. Consequently, the formula for the Graham number can also be written as follows:
This is one of the ways to estimate the intrinsic value of business based on their book value and their earnings power.
Unlike valuation methods such as DCF or Discounted Earnings, the Graham number does not take growth into the valuation. Unlike the valuation methods based on book value alone, it takes into account the earnings power. Therefore, the Graham Number is a combination of asset valuation and earnings power valuation.
In general, the Graham number is a very conservative way of valuing a stock. It cannot be applied to companies with negative book values.
Graham value is applicable only to the companies that have positive earnings and positive tangible book value.
The final number is, theoretically, the maximum price that a defensive investor should pay for the given stock.Put another way, a stock priced below the Graham Number would be considered a good value, if it also meet a number of other criteria.
The complete Graham selection procedure is much more elaborate. No decision should be made based on this number alone.
When applying any of those valuation methods, you need to be aware of their limitations. Please keep these in mind:
1. Graham Number does not take growth into account. Therefore it underestimates the values of the companies that have good earnings growth. We feel that if the earnings per share grows more than 10% a year, Graham Number underestimates the value.
2. Graham Number punishes the companies that have temporarily low earnings. Therefore, an average of earnings makes more sense in the calculation of Graham Number.
3. Graham Numbers underestimates companies that are light with book.
Source: Edited articles from Wikipedia and http://www.forbes.com
Quote for the day
"The only true test of whether a stock is “cheap” or “high” is not its current price in relation to some former price, no matter how accustomed we may have become to that former price, but whether the company’s fundamentals are significantly more or less favorable than the current financial-community appraisal of that stock." – Philip Fisher
Friday, 31 December 2021
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