What Is the Benjamin Method?
The Benjamin Method is a term used to describe the investment philosophy of Benjamin Graham (1894-1976), who is credited with inventing the strategy of value investing using fundamental analysis, whereby investors analyze stock data to find assets that have been systematically undervalued.
Key Takeaways
- The Benjamin Method refers to the original value investing philosophy created by Benjamin Graham in the 1930s.
- Graham focused on long-term investment in companies based on fundamental analysis of financial ratios and rejected short-term speculation.
- Legendary value investor Warren Buffett has credited the Benjamin Method with his success.
Understanding the Benjamin Method
The Benjamin Method of investing is the brainchild of Benjamin Graham, a British-American investor, economist, and author. He came to prominence in 1934, with the publication of his textbook Security Analysis, which he co-wrote with David Dodd. Security Analysis is a foundational book for the investment industry today, and the teachings of Benjamin Graham heavily influenced famous investors like Warren Buffett. Benjamin Graham taught Warren Buffett while Buffett was studying at Columbia University, and Buffett has written that Graham’s books and teachings “became the bedrock upon which all of my investment and business decisions have been built.” His famous book,The Intelligent Investor, has gained recognition as the foundational work in value investing.
Benjamin Graham’s method of value investing stresses that there are two types of investors: long-term and short-term investors. Short term investors are speculators who bet on fluctuations in the price of an asset, while long-term, value investors should think of themselves as the owner of a company. If you are the owner of a company, you shouldn’t care what the market thinks about its worth, as long as you have solid evidence that the business is or will be sufficiently profitable.
Using the Benjamin Method
The original Benjamin Method for finding the intrinsic value of a stock was:
V=EPS×(8.5+2g)where:V=intrinsicvalueEPS=trailing12-mthEPSofthecompany8.5=P/Eratioofazero-growthstock
In 1974, the formula was revised to include both arisk-free rateof 4.4%, which was the average yield of high-gradecorporate bondsin 1962 and thecurrent yieldonAAA corporate bondsrepresented by the letter Y:
V=YEPS×(8.5+2g)×4.4
Example Using the Benjamin Method
Let’s say you are an investor who is considering purchasing shares in the hypothetical Philadelphia Widget Company. The company is well known and is the leading purveyor of widgets in America. Its stock is trading at $100 per share, while it earns $10 per year in profits. A competitor to the Philadelphia Widget Company is the Cleveland Widget Company, a younger upstart that is not well known but has gained market share in recent years. It earns far less money, just $2 per year, but the stock is also a lot cheaper at $15 per share.
An investor following the Benjamin Method of investing would use these figures and other data to perform a fundamental analysis of the company. For instance, we can see that the Cleveland Widget Company is cheaper for every dollar of earnings to buy than the Philadelphia Widget Company. The price-to-earnings (P/E)ratio of the Philadelphia Widget Company is 10, whereas it is 7.5 for the Cleveland Widget Company. A follower of the Benjamin Method of investing would conclude that the Philadelphia company is overpriced simply because it is well known. This investor would choose the Cleveland company instead.
FAQs
Example of the Graham Number
For example, if the earning per share for a single share of company ABC is $1.50, the book value per share is $10, the Graham number would be 18.37. ((22.5*1.5*10)1/2= 18.37). Again, $18.37 is the maximum price an investor should pay for a share of ABC, according to Graham.
What is the formula for the Graham's number? ›
22.5× (Earnings Per Share) × (Book Value Per Share)
For the application of the Graham Number, there are a number of mandatory conditions: The EPS multiple, 15, used in the formula, represents the price-to-earnings ratio that cannot be higher than 15 in any case.
What is the Benjamin method? ›
The Benjamin Method refers to the original value investing philosophy created by Benjamin Graham in the 1930s. Graham focused on long-term investment in companies based on fundamental analysis of financial ratios and rejected short-term speculation.
What is the Graham's growth formula? ›
The initial formula as described by Graham was as follows: Intrinsic Value = EPS * (8.5 + 2g). In this case, g represents the expected annual growth “over the next seven to ten years”. 8.5x was therefore Graham's effective base P/E for a no-growth company.
Which one is an example of a formula? ›
Formulas are equations that perform calculations on values in your sheet. All formulas begin with an equal sign (=). You can create a simple formula by using constant and calculation operator. For example, the formula =5+2*3, multiplies two numbers and then adds a number to the result.
What is an example of a simple formula? ›
A simple math equation comprises variables and constants. For example, in 3x + 2 = 23, x is a variable. The numbers 2 and 23 are constants, as they do not change. “+” is an operator, the operator may be + or –.
How many zeros are in Graham's? ›
That leads to the number , which is known as a googol. It is a one followed by 100 zeros. (Fun fact: this number inspired the name of the search engine Google, but the company's founders accidentally misspelled it when checking whether the web domain was still available. The rest is history.)
Can you memorize Graham's number? ›
“If you even try to imagine Graham's number, your head would break down into a black hole because your head cannot store the information required to envisage it,” website Physics Astronomy explains. The Graham's number is so long that there is not enough space in the universe to write down all the digits.
Is Tree 3 bigger than Graham's number? ›
Other specific integers (such as TREE(3)) known to be far larger than Graham's number have since appeared in many serious mathematical proofs, for example in connection with Harvey Friedman's various finite forms of Kruskal's theorem.
What is the Benjamin equation? ›
In mathematics, the Benjamin–Ono equation is a nonlinear partial integro-differential equation that describes one-dimensional internal waves in deep water. It was introduced by Benjamin (1967) and Ono (1975). where H is the Hilbert transform.
Benjamin's Romantic theory of immanent criticism insists that the work must contain its own inner criterion, such that the critic proceeds from the work itself and not from the life of the author (SW 1, 321).
What is the rule of 72 helps you determine? ›
Do you know the Rule of 72? It's an easy way to calculate just how long it's going to take for your money to double. Just take the number 72 and divide it by the interest rate you hope to earn. That number gives you the approximate number of years it will take for your investment to double.
How accurate is Benjamin Graham's formula? ›
Graham also cautioned that his calculations were not perfect, even in the time period for which it was published, noting in the 1973 edition of The Intelligent Investor: "We should have added caution somewhat as follows: The valuations of expected high-growth stocks are necessarily on the low side, if we were to assume ...
What is the classic formula for Benjamin Graham? ›
√[22.5 x EPS x BVPS] is an Intrinsic Value investing formula that Benjamin Graham — Warren Buffett's mentor — did recommend, but with conditions. Classic Graham Screener Free!
How do you calculate Graham's ratio? ›
Page 3
- to incorporate the initial gas readings, and to incorporate nitrogen by difference to include.
- effects of dilution, the following equation 1 is applicable:
- Graham's Ratio =
- 100× (carbon monoxidefinal)
- (0.265 × nitrogenfinal)‑oxygenfinal.
- (1)
When the particles of a material are in an area of low concentration, they tend to move to the content with a high area of concentration. A straightforward example of this process is when we use perfume or a scented spray in one part of the room, and then we can smell it in the entire room.
What is an example of a Graham value? ›
For example, if a stock has a current market price of $50 and a calculated Graham Number of $40, the Price to Graham Number Ratio would be 1.25x (50 / 40 = 1.25x). This suggests that the stock might be overvalued by 25% according to Graham's criteria.
What is an example of an absolute formula? ›
Place a "$" before the column letter if you want that to always stay the same. Place a "$" before a row number if you want that to always stay the same. For example, "$C$3" refers to cell C3, and "$C$3" will work exactly the same as "C3", expect when you copy the formula.
What is the Graham method of investing? ›
Graham believed that for a company to be worthy of investment, it should have consistent positive earnings over time. He recommends defensive investors to look at the earnings of the past 10 years and assess if the company has been profitable and consistent over time or not.
