Here’s a breakdown of the formula:
A company’s “EPS” is its earnings per share, or earnings divided by the total shares outstanding.
At the time the formula was developed, Graham calculated that the average price to earnings for non-growth stocks was 8.5.
The “g” represents the seven- to 10-year growth outlook for the company.
When Graham developed the formula, the average yield on AAA corporate bonds was approximately 4.4%.
“Y” is the current yield on long-term corporate bonds.
Each element is quite simple on its own. Yet by putting them together, Graham forged a powerful tool for estimating a stock’s true value.
While as a student and employee of Benjamin Graham, Buffett learnt and mastered this investment secret.
And it’s not only helped him grow Berkshire Hathaway into a $550 billion company, but also transformed him into one of the most successful investors ever.
In fact, Buffett himself says his investment style was 8