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Ben Graham On The Role Of Intrinsic Value In Analyzing Stocks (Part 1) Announcement

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This approach is as old as Wall Street, and, although a (very) few traders may Value Ideas
consistently make money using this approach (without the benefit of an advantage » LwC: Massive Insider Trading
such as high-frequency trading), the average person cannot. Investigation...
» rncarpio: How can an individual
Against this backdrop, Benjamin Graham came along and introduced a powerful new idea into the field of security investor... (1 reply)
analysis. The foundational idea was that when you buy a stock certificate you are buying a small piece of a real » shulink: JASO - Solar stock to
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business. And if that is the case, a person ought to be able to come up with some idea of what the business is
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worth by studying the facts: the assets, earnings, dividends, future prospects, management, litigation, etc. This is
what Graham called intrinsic value. Graham further recognized that because of the enormous volatility in the stock
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underlying business was worth. This discount not only provided a rational basis for the expectancy of a decent
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Author Website return (or indecent, depending on the level of undervaluation), but also afforded the investor a cushion of safety Fargo to Pay Citi 100 million...
against errors in judgement and analysis, and unforeseen future events.
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Graham points out that it is not possible to determine the intrinsic value of a business with exact precision. It is » Konstantin: Soros
Gurus Discussed: usually a range of values. If you can establish this range, you can then determine if the stock is undervalued, » AlexS50: View on Bill Ackman
Ben Graham: overvalued, or fairly valued. This lack of precision need not be a problem, if you can buy the stock cheap enough.
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By analogy, Graham says it is quite possible to determine that a man is obese even if we do not know his precise Jones
weight, or that a woman is old enough to vote even if we do not know her precise age. » Cosmopolite: Chimera
Current Portfolio Investment Corp. (CIM)...
Stock Picks In Security Analysis (Sixth Edition) (pages 63-67), Graham gives two example of equities where he determines » Bill Investor: View on David
their intrinsic value. Tepper
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Writers Wright Aeronautical Corporation Soros
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Here is a profile of the company in 1922:
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Share price: $8.00 U.S. Quantitative Easing be...

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Earnings: over $2.00

Dividends: $1.00

Cash per share: $8.00

Graham’s range of intrinsic value: $20 to $40


1. Graham concluded the stock would be a bargain at $8.00 per share.

2. The low end of the intrinsic value range is at most 10x earnings and as low as 6x earnings if we assume

1 of 3 11/23/10 9:29 AM
Ben Graham on the Role of Intrinsic Value in Analyzing Stock... http://www.gurufocus.com/news.php?id=107576

that the company had no debt. (At $20 per share you would only be paying $12 per share net of cash.)
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3. In no case would Graham estimate the value to be greater than 20x earnings ($40/$2). » davethebooker@hotmai: Re:
CenturyLink, Inc. – A Qwest f...
Here is a profile of the company in 1928:
» batbeer2: On Investment
Modeling, Part 3
Share price: $280.00
» graemew: Kirkland's: The
Falling Knife
Earnings: over $8.00 ($3.77 in 1927) » graemew: Re: Benjamin
Graham Lecture - Compa...
Dividends: $2.00 » Cowboy77: Bought Fairfax
Net-asset value: $50.00 » paulwitt: Re: Consuel Mack
Interviews David E...
Graham’s range of intrinsic value in 1929: $50 to $80 » Sivaram: Re: How can an
individual investor ...
Observations: » batbeer2: Re: Do You Believe
There is a Bond ...
» gurufocus: Re: Bruce Berkowitz
1. Graham thought that Wright Aeronautical might be worth as little as just over 6x its 1928 earnings. Launches New Fu...
Graham may have looked at the earnings in 1927 and been unconvinced that the company could maintain » bmichaud758: Re: 4 Reasons to
earnings at the $8.00 level. Buy Bank of Americ...
» toponemike: Re: Ben Graham
2. In no case would Graham pay more than 10x (what appear to be peak) earnings of $8.00 per share. Lecture - Investment...
3. At $280.00 per share (35x 1928 earnings), Graham thought it was clear that Wright Aeronautical was » graemew: Re: The Endowment
Effect: How Does ...
» softdude2000: Re: Margin of
Tomorrow I’ll take a look at J.J. Case Common and draw some conclusions for our use as contemporary value Safety Doesn’t Equa...
investors. » davethebooker@hotmai: Re:
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Greg Speicher


Gregory Speicher is an Ohio-based investor. His career has primarily been in technology start-ups and small growth
companies, including an Inc. 500 Company which he cofounded. He also holds several patents. He received his
bachelor's degree in philosophy Magna Cum Laude from the University of St. Thomas in Rome, Italy, and attended
the MBA Program at the Wharton School of the University of Pennsylvania. He has attended Professor Bruce
Greenwald's Value Investing Executive Education Course at Columbia University and continues to read and study
widely in the field of value investing. Visit his website: GregSpeicher.com

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Check out Ben Graham Stock Picks, and Current Portfolio,

More on Ben Graham:

Benjamin Graham Lecture - Comparative Balance Sheet Approach - Nov 21, 2010

Ben Graham Lecture - Investment Selectivity - Nov 19, 2010

Ben Graham on the Role of Intrinsic Value in Analyzing Stocks (Part 2) - Sep 21, 2010

Jason Zweig: Lesson and Ideas from Benjamin Graham - Sep 18, 2010
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Buffett Taps Combs – Confirms Principles - Oct 27, 2010

The Mark of a Good Business: High Returns on Capital (Part 2) - Oct 26, 2010

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Francis Chou: Canadian Investing Guru - Oct 20, 2010

User Comments:

1. Adib Motiwala says on Sep 20, 2010 at 6:54 PM:


For the first company he was ok to pay a max of 20x earnings but for the 2nd one only 10x earnings? Is it because
the earnings were not sustainable or was it something else about the business? Also, for the max 20x he did not
account for the cash position. Its interesting because when we look at the large cap tech stocks such as Apple
(AAPL), Microsoft (MSFT), Google (GOOG), analysts always seem to subtract the cash from the market cap to
arrrive at a P/E multiple. Obviously, the multiple looks much different if you subtract the cash.

I wonder what kind of value he would place on AAPL, GOOG, MSFT, NFLX and CRM.

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2 of 3 11/23/10 9:29 AM
Ben Graham on the Role of Intrinsic Value in Analyzing Stock... http://www.gurufocus.com/news.php?id=107576

2. Davidm1 says on Sep 21, 2010 at 12:46 AM:

What method does he use to get intrinsic value?

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