Comments on: Tutorial: Calculating the Graham Number http://www.dividendsmatter.com/tutorial-calculating-the-graham-number/2007/09/10/ Everyone else gets paid. Why shouldn't you? Thu, 28 Aug 2008 20:30:59 +0000 http://wordpress.org/?v=2.2 By: Keith http://www.dividendsmatter.com/tutorial-calculating-the-graham-number/2007/09/10/#comment-241 Keith Mon, 08 Oct 2007 19:02:19 +0000 http://www.dividendsmatter.com/tutorial-calculating-the-graham-number/2007/09/10/#comment-241 average_joe if you are getting your data from ADVFN which Book Value figure do you use? The Book Value or the Tangible Book value? average_joe

if you are getting your data from ADVFN which Book Value figure do you use? The Book Value or the Tangible Book value?

]]> By: Mike Sanders http://www.dividendsmatter.com/tutorial-calculating-the-graham-number/2007/09/10/#comment-208 Mike Sanders Sun, 16 Sep 2007 19:54:40 +0000 http://www.dividendsmatter.com/tutorial-calculating-the-graham-number/2007/09/10/#comment-208 Debu & average_joe Graham's P/E and P/B were based on 75+ years of data. If you look rolling 20 year periods the numbers are very consistent. If we inflate Graham's number because our interest rates are 5% not 7.5% we risk following the the "pied piper" and forget what Mr. Graham was trying to tell us. Intrinsic Value of the company is what we are trying to find. If your are looking for adjustments based on current interest rates, I would suggest comparing Earnings Yield of the stock to Short Term Safe Treasuries. Earnings Yield is the inverse of the PE. A stock with a PE of 15 would have an Earnings Yield(EY) of 6.66%, a PE of 20 would give the stock an EA of 5.0% and then you could decide if the margin of the EA is enough of a cushion for you to take on the extra risk of stock ownership vs a safe US Treasury. I for one would not be willing to buy a stock with a 5% EY unless the dividend was 3% and safe. Debu & average_joe
Graham’s P/E and P/B were based on 75+ years of data. If you look rolling 20 year periods the numbers are very consistent. If we inflate Graham’s number because our interest rates are 5% not 7.5% we risk following the the “pied piper” and forget what Mr. Graham was trying to tell us. Intrinsic Value of the company is what we are trying to find. If your are looking for adjustments based on current interest rates, I would suggest comparing Earnings Yield of the stock to Short Term Safe Treasuries. Earnings Yield is the inverse of the PE. A stock with a PE of 15 would have an Earnings Yield(EY) of 6.66%, a PE of 20 would give the stock an EA of 5.0% and then you could decide if the margin of the EA is enough of a cushion for you to take on the extra risk of stock ownership vs a safe US Treasury. I for one would not be willing to buy a stock with a 5% EY unless the dividend was 3% and safe.

]]> By: average_joe http://www.dividendsmatter.com/tutorial-calculating-the-graham-number/2007/09/10/#comment-204 average_joe Fri, 14 Sep 2007 01:30:07 +0000 http://www.dividendsmatter.com/tutorial-calculating-the-graham-number/2007/09/10/#comment-204 Interesting thought Debu. And your argument definitely makes sense. I think what I might do for the next little while is put up the 'Classical' Graham number (using the 22.5) as well as this new modified Graham number (using the 30) just to see how it changes the analysis. Should be interesting. Interesting thought Debu. And your argument definitely makes sense.

I think what I might do for the next little while is put up the ‘Classical’ Graham number (using the 22.5) as well as this new modified Graham number (using the 30) just to see how it changes the analysis.

Should be interesting.

]]> By: Debu http://www.dividendsmatter.com/tutorial-calculating-the-graham-number/2007/09/10/#comment-203 Debu Thu, 13 Sep 2007 16:22:50 +0000 http://www.dividendsmatter.com/tutorial-calculating-the-graham-number/2007/09/10/#comment-203 Thanks for the nice explanation. As Graham's number (22.5) was calculated considering 7.5% yield, wondering if it would be more appropriate now to increase the number to 30 instead of 22.5 for current valuation, considering 5% yield rates and P/E values working out to be 20. Your valuable comments are much appreciated. Thanks for the nice explanation. As Graham’s number (22.5) was calculated considering 7.5% yield, wondering if it would be more appropriate now to increase the number to 30 instead of 22.5 for current valuation, considering 5% yield rates and P/E values working out to be 20. Your valuable comments are much appreciated.

]]> By: average_joe http://www.dividendsmatter.com/tutorial-calculating-the-graham-number/2007/09/10/#comment-202 average_joe Thu, 13 Sep 2007 00:35:56 +0000 http://www.dividendsmatter.com/tutorial-calculating-the-graham-number/2007/09/10/#comment-202 That is exactly right Michael. Jordan: You asked where the 22.5 comes from. Part of it comes from the fact that Graham believed that the price-to-earnings ratio should not be higher than 15. Where did the 15 come from? Well, Graham wanted his portfolio to have a yield equal yield to that of a AA bond. Back then, the yield was 7.5%. The inverse of this yield is 1 divided by 7.5%. That works out to 13.3. So that was his target price-to-earnings ratio for his portfolio. I guess he rounded up to 15. Obviously that yield is higher than is available today. That is exactly right Michael.

Jordan:

You asked where the 22.5 comes from. Part of it comes from the fact that Graham believed that the price-to-earnings ratio should not be higher than 15.

Where did the 15 come from? Well, Graham wanted his portfolio to have a yield equal yield to that of a AA bond. Back then, the yield was 7.5%. The inverse of this yield is 1 divided by 7.5%. That works out to 13.3. So that was his target price-to-earnings ratio for his portfolio. I guess he rounded up to 15.

Obviously that yield is higher than is available today.

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