Adjusting Benjamin Graham's Price Calculations Today

Benjamin Graham — Warren Buffett's mentor and founder of Value Investing — recommended a P/E ratio no higher than 13.3 based on an AA bond yield of 7.5%.

Our basic recommendation is that the stock portfolio, when acquired, should have an overall earnings/price ratio—the reverse of the P/E ratio—at least as high as the current high-grade bond rate. This would mean a P/E ratio no higher than 13.3 against an AA bond yield of 7.5%.
Chapter 14: Stock Selection for the Defensive Investor, The Intelligent Investor.

Based on the same principle, a defensive investor today could consider stocks with P/E ratios up to 37, since 10-year AA corporate bond yields are now close to 2.69% [March 2015].

Adjusting Graham's criteria to screen Defensive grade stocks with P/E ratios of 37 instead of 15 (all else being equal) would involve the following:

37÷15 = 2.467
√2.467 = 1.57

We would need to multiply the Graham Number of a stock by 1.57, to adjust it to a P/E of 37.

Note: Since the Graham Number is designed to balance Earnings and Assets, stocks with P/E values higher than 37 could clear Graham's rules too if they have lower P/B values.

Serenity's default Graham analyses and the Classic Graham Screener use Graham's recommended numbers. But the Advanced Graham Screener can be used to screen for stocks using the adjusted figures.

For example, the filter values for finding Defensive grade stocks adjusted to a P/E of 37 would be:

Graham Grade: Defensive
Intrinsic Value(%) > 65%

65% is used for the Intrinsic Value(%) because the reciprocal of 1.57 is 0.6367, or 63.67%; and Intrinsic Value = Graham Number for Defensive grade stocks.

Prices for Enterprising grade stocks can be adjusted similarly as well.

Considering today's bond yields, Defensive and Enterprising grade stocks with an Intrinsic Value(%) exceeding 65% on Serenity could be considered true Graham stocks.

Comments

After all that,how we calculate the Graham number now a days? Can you full explain it with real numbers?

serenity's picture

Dear Vic Mac,

Please see the tutorial section on Graham Numbers for a detailed explanation.

Hope this answers your question.
Thank you for being on Serenity!

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