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Strategies & Market Trends : Value Investing
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To: E_K_S who wrote (46073)12/30/2011 1:11:11 AM
From: Paul Senior  Read Replies (1) of 78753
 
I find many media authors' use of the Graham number to be too generous, resulting in two things: First, a large number of stocks seem to qualify that otherwise don't seem to meet my criteria for value. And secondly, that the fair value calculations result in fair values that seem extraordinarily large compared to current stock price -- sometimes to the extent that the fair value number exceeds any price the stock has ever come close to.

I'll point out a couple of ways in which the stocks qualifying and their Graham fair number might be reduced.

Intelligent Investor ('73 edit.) , p. 182: "Price no more than 15 times average earnings of the past three years"

Defensive investor use of the formula, p. 185: no deficit in company's ten year record.

Defensive investor use of the formula, p. 185: a long history of continuous dividends (Referring back to p. 181, I presume that to mean "Continued dividends for at least the past 20 years")

That ought to cut down the number of qualifying companies -g-.

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I suggest what you want - if we're talking Dr. Graham -- is that if the AA bond rate is 5%, that the earnings yield should be no more that that also. (Reference p. 186). Earnings yield being earning/price or reciprocal of the p/e. So p/e to be paid should be no more than 20 in a 5% AA bond environment. (1/20 =.05 = 5%)
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