How to Use the Graham Number to Invest: Investing using the Graham Number is a great way to improve your profitability. That’s because when you learn how to use the Graham Number to invest, you get a an easy to use tool for valuing stocks.
Not only does learning how to use the Graham Number to invest give you an idea of what your company is worth, it also gives value investors a target sell price. When a lot of investors are starting out they have trouble understanding when they should sell a stock. Investing with the Graham Number can thus provide very valuable.
So in this short blog post I’ll explain in detail what the Graham Number is, how you can calculate the Graham Number, and how you can use the Graham Number to improve your own analysis and stock picks. Does that sound okay?
How to Use the Graham Number to Invest – the Basics:
Before you can learn how to use the Graham Number to invest, you need to understand what the Graham Number is, and how to calculate it. Luckily, this is all quite simple. The Graham Number is a great investing tool because it explains “the maximum amount a conservative investor would pay for a stock.” That means…
When you’re using the Graham Number to invest, it gives you a conservative measure of what the company you’re analyzing for investment is worth. Does that make sense?
If you look for stocks that are trading 30% or more below their Graham Number, then you know they are very conservatively valued and might make a good value investment. The Graham Number gives you an excellent inside look at how much the company is worth and thus gives you a quick and dirty calculation to discover your upside reward. So let’s go a step further and actually learn how to calculate the Graham Number ourselves for analyzing investments…
How To Use The Graham Number to Invest – Calculating The Graham Number:
Calculating the Graham Number is very easy to do. All you need is a simple calculator. So here is how you calculate the Graham Number so that you can use it to help your stock market investing:
- Find a stock that you are fundamentally interested in. If you need stock ideas sign up for email or try out some free stock screens.
- Look up the book value per share of your stock, and look up the earnings per share (EPS) of your stock. Ideally you would take the average EPS of the last three years (just to ensure the current earnings are not an anomaly). But if the trailing twelve month EPS is all you have that’s okay.
- Multiple the EPS value by the book value per share and multiply the total by 22.5
- Square root the answer from step #3.
- You have now calculated the Graham Number!
As you can see, calculating the Graham Number is very easy! Of course the Graham Number is not the only thing you should consider when you’re learning to invest. But it’s an important metric that value investors can use to understand what the earnings and assets of a company are worth.
And that’s why I like to use the Graham Number to invest – because it takes into account both earnings and assets which are two important factors in valuing a company. Plus, since using the Graham Number to invest is so fast and easy it is a good way to quickly eliminate stock ideas, or isolate those investment possibilities that may merit further research. And to be honest…
Buying stocks trading at 30% or more discount to their Graham Number and then selling them when they revert to the Graham Number has been a very profitable investment strategy for me over the last few years.
So I hope this blog post has helped you understand how to use the Graham Number to invest. I really encourage you to use the Graham Number yourself, especially if you’re unsure whether or not a stock is undervalued. And if you have any questions about how to use the Graham number to invest please drop me a note in the comments below!
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