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

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such as high-frequency trading), the average person cannot. Investigation...
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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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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
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weight, or that a woman is old enough to vote even if we do not know her precise age. » Cosmopolite: Chimera
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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

Observations:

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
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Earnings: over $8.00 ($3.77 in 1927) » graemew: Re: Benjamin
Graham Lecture - Compa...
Dividends: $2.00 » Cowboy77: Bought Fairfax
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Net-asset value: $50.00 » paulwitt: Re: Consuel Mack
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1. Graham thought that Wright Aeronautical might be worth as little as just over 6x its 1928 earnings. Launches New Fu...
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earnings at the $8.00 level. Buy Bank of Americ...
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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
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overvalued.
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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...
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Greg Speicher

[www.gregspeicher.com]

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
More by Greg Speicher:

Buffett Taps Combs – Confirms Principles - Oct 27, 2010

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

Gold Hiding in Plain Sight - Oct 21, 2010

Francis Chou: Canadian Investing Guru - Oct 20, 2010

User Comments:

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

Greg,

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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