Graham-Style Formula
Benjamin Graham was known for his thorough financial analysis of companies, but he also experimented with many simple rules of thumb.
Here is a valuation formula adapted from
The Intelligent Investor:
P/E = 8.5 + 2G
where P/E is the fair P/E ratio, and G is the earnings growth rate.
The idea is that you get a formula that's simple enough to use in the privacy of your own skull, without needing a computer or calculator.
There is a drawback with this formula: as written, it gives answers that are on the high side.
But the good news is that with some modifications, this style formula can give you a very fair estimate of the real answer.
It's almost as simple as the PEG ratio, and much more accurate.
This calculator lets you check the accuracy of the formula.
(It's initialized with a more conservative version of the formula than what's given above.)
To use this tool, first choose realistic growth assumptions (being conservative - remember that you're trying to protect yourself from overpaying)
and memorize the simple formula that comes out of the second calculator.
Use the first calculator to see what values of "G" the formula works well for (huge "G" and/or aggressive growth assumptions are what make it fail).
Then you can amaze financial experts with your freakish ability to estimate a two-stage discounted cash flow analysis in your head.
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