Pleadian

Graham Number

Graham Number is named after the “father of value investing,” Benjamin Graham, who was a mentor of Warren Buffett. The figure takes into account earnings per share and book value per share to measure a stock's maximum fair market value. In other words, it is the upper end of the price range that a defensive investor should pay for the stock.

The Graham Number = Square Root of (22.5) x (tmm EPS ) x ( mrq Book Value per Share).

The 22.5 is included in the formula as a rule of thumb to account for Graham's assumption that the price-to-earnings ratio should not be over 15 and the price to book ratio should not be over 1.5 for an undervalued stock. So, the number is generated as (P/E of 15) x (P/B of 1.5) = 22.5.

So the script generates a Graham number plot.
Release Notes: Using Diluted EPS rather than Basic
EPS and Book value per share time period settings
Release Notes: Chart line coloring feature. When the price is below Graham number chart line is green otherwise red.
Release Notes: When sqrt(x) is not possible in real numbers on an interval paint a gray line.
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Comments

Hi Pleadian,

It is allways good to see when somebody comes to the same conclusion as yourself. :-)

I use similar calculation in my set of value investing charts and indicators. The main pane can be seen here:

I called it Warrens limit price but it is the same thing what you have described. You can find it on my chart: ploted in red, if the price is above and green, if the price is below the limit level. You can also see my Intrinsic Value calculation ploted pink and the Debt to Equity ration ploted yellow. These are all crutial indicators for Graham and Buffet.

One remark: you use the TTM Basic EPS figure (trailing 12 month) which gives you a rather high value for this calculation. I use the Diluted EPS Annual figure.

The Basic Earning per share figure is calculated without taking any convertibles (prefered stocks, bonds, warrants, options etc.) into consideration. The exaple you have choosen with the Big Lots Inc shows why it is rather dangerous: the Graham Number your formula calculates with the Basic EPS TTM is almost $95, giving the impression that there is plenty of room (marginof safety) for value investors before the price reaches this level and becomes overpriced.
However if you take all the convertibles for Big Lots Inc into consideration (so in the worse case scenario when all of those securities are turned into common stocks) this limit price under which Warren Buffet or Ben Graham (and also Peter Lynch) considers this stock cheap comes down as low as $54,80 which is rather close to the month's high of $53,70.

The $40 difference shows you the hidden danger a long term investor is running if he/she is calculating only with the Basic EPS instead of the Diluted EPS. The longer your investment timespan is the bigger the hidden risk becomes that more and more of those convertibles turned into common stocks thus diluting the earnings per share figure.

I am happy to see that value investing methods and calculations find their ways into this community as there are very few ideas you can find for this subject around here. Keep uip the good work.

Please also check out my Intrinsic value calculator at

Good job, congrats!

Peter
Reply
Pleadian PeterNagy
@PeterNagy, thank you for your reply and for highlighting some crucial ideas. Actually, I am currently using an "Intrinsic value calculator" you created and used it even before I came up with an idea that I need some lightweight Graham number script. Your remark about Basic EPS and Diluted EPS is on point and I absolutely share concerns about risks.

Soon I will update the script with the addition of Diluted EPS.

Thanks,

Pleadian
Reply
PeterNagy Pleadian
@Pleadian, Thank you! Well updated script! I particularly like the gray line idea for the negative square roote places: my version is missing that feature.

Well done, congrats! Kepp up the good work!

Peter
Reply
This is nice work. Thanks!
Reply
Pleadian AlphaBeta
@AlphaBeta, Thanks!
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This publication is now featured in our Editors' Picks. In the name of all TradingView traders, thank you for your valuable contribution to the TradingView community, and congrats!
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