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Written by Dr. Econ   
Saturday, 02 July 2011 11:27

Benjamin Graham, known as the father of value investment, is prominent investor as well as an academician. He uses back-testing models to verify his conclusions on his formulas. Graham is a value investor and he has published several books on value investment. He is also known for simple estimation rules for the fair value of a company. His investment decision is based on margin of safety concept.

His formula for estimating margin of safety is based on the following:

Long-Term Valuation (LTV) = Earnings Per Share x (8.5 + 2 x Estimated Long-Term Earnings Growth) x (4.4 / Corporate Bond Yield)

One can calculate the margin of safety as the percentage difference between Long-Term Valuation and current price of a stock:

Margin of Safety = (LTV - Price) / LTV

Buffet suggests a minimum of 30% margin of safety. Note that margin of safety is a very dynamic concept. As stock prices move up and down, both long-term valuations and margin of safety change. From time to time, I look at the stocks with nifty margin of safety. Here, is a list of articles on margin of safety:

Top Dow Jones Stocks With Highest Margin of Safety August 29, 2011

33 Telecommunication Stocks With the Highest Margins of Safety (March 21, 2011)

27 Energy Stocks Benjamin Graham Would Like (March 13, 2011)

Benjamin Graham's Perspective on the Dow Jones (March 10, 2011)

 


Last Updated on Friday, 02 September 2011 18:09
 

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