It does at first seem deceptively simple, but as with a lot of such things it's interpretation and application seems to be stuck in the mists of time.
Here is are a couple of internet descriptions/definitions:
https://en.wikipedia.org/wiki/Benjamin_Graham_formula
https://www.valuewalk.com/graham-formul ... -screener/
https://marketxls.com/ben-graham-formula/
Apparently the first crack at the formula goes like this:
V = EPS x (8.5 + 2g)
V = the value expected from the growth formulas over the next 7 to 10 years
EPS = trailing twelve months earnings per share
8.5 = P/E base for a no-growth company
g = reasonably expected 7 to 10 year growth rate
But then Graham modified the formula to account for rising interest rates/bond yields:
V = EPS x (8.5 + 2g) x (4.4/Y)
where the additional elements are (allegedly):
4.4= the average yield of AAA corporate bonds in 1962 (Graham did not specify the duration of the bonds, though it has been asserted that he used 20 year AAA bonds as his benchmark for this variable)
Y= the current yield on AAA corporate bonds.
Anyway, fear not, I'm not rushing to apply this formula everywhere I can.....though I do think that it's outputs are sometimes quoted in various subscription-based investment web services. (Stockopedia? But don't quote me on that please..).
However there are one or two aspects of the above which puzzle me:
1. When they refer to g does this mean the "expected annual growth rate" over the following 7-10 year period? Or is g meant as being the growth rate over the entire period? For example 41% growth over 7 or so years I believe equates to a 5% annual rate compounded...
2. The 4.4 figure for the average yield of corporate AAA bonds, looks silly. I appreciate the addition of a "weighting" factor to account that bonds are either yielding high or low, since this would obviously push equity desirability in the reverse direction. However, having 4.4 stuck in the formula forever, just seems to like mumbo-jumbo to me.
Has anyone else encountered this formula? If so, I'd love to hear other views on it and it's modern day interpretation/relevance.
Matt