📖Benjamin Graham

Graham Number

🌳 Advanced★★★★☆

Multiply PE ratio by PB ratio and reject any stock where the product exceeds 22.5. This is a comprehensive valuation metric that takes into account both earnings and assets. Calculate PE × PB to identify stocks trading below 22. Graham's Number = √(22.5 × EPS × BVPS). The product of the price-to-earnings ratio and the price-to-book ratio should not exceed 22.5 (i.e., PE × PB ≤ 22.5). Key insight: The Graham Number combines earnings and asset criteria into a single test. Start with a minimal checklist: Am I investing or speculating?; Am I focused on value?; Is this a sound investment?.

  • Am I investing or speculating?
  • Am I focused on value?
  • Is this a sound investment?
  • Define your approach clearly

Avoid misuse: This serves as the initial screening criterion.

💬

The product of PE and PB should not exceed 22.5.

— _The Intelligent Investor_，1949

🏠 Everyday Analogy

Just as when buying a house, one must consider both the price-to-income ratio and the price-to-net-worth ratio. If the house price is 15 times the annual income and simultaneously 1.5 times the net worth of the property, then 15 × 1.5 = 22.5 is exactly the threshold. Exceeding this number is like a house being both expensive and overvalued, posing too great a risk. Using this simple formula, Graham helped investors avoid stocks that are both "expensive and inflated."

📖 Core Interpretation

The product of the price-to-earnings ratio and the price-to-book ratio should not exceed 22.5 (i.e., PE × PB ≤ 22.5).
💎 Key Insight：The Graham Number combines earnings and asset criteria into a single test. A stock at 15x earnings and 1.5x book value exactly hits 22.5. This compound metric prevents distortion: a very low PE cannot justify an extremely high PB, and vice versa. It enforces balanced value across both dimensions simultaneously.

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❓ Why It Matters

This is a comprehensive valuation metric that takes into account both earnings and assets.

🎯 How to Practice

Calculate PE × PB to identify stocks trading below 22.5. Graham's Number = √(22.5 × EPS × BVPS).

🎙️ Master's Voice

The individual investor should act consistently as an investor and not as a speculator.
Graham distinguished sharply between investing and speculating. Investors focus on value; speculators focus on price movements.

⚔️ Practical Guide

✅ Decision Checklist

  • Am I investing or speculating?
  • Am I focused on value?
  • Is this a sound investment?

📋 Action Steps

  1. Define your approach clearly
  2. Focus on business value
  3. Avoid speculation

🚨 Warning Signs

  • Speculation habits
  • Price-focused thinking
  • No value basis

⚠️ Common Pitfalls

✕This serves as the initial screening criterion.
✕Further analysis is required.

📚 Case Studies

1
Dot-Com Bubble Overvaluation (1999)
An investor analyzes a popular internet stock trading at 80x earnings. The Graham Number suggests intrinsic value far below market price, indicating extreme overvaluation.
✨ Outcome：Investor avoids purchase. After the 2000 crash, the stock falls over 70%, validating the Graham-based caution.
2
Post-Crisis Bank Stock Screening (2009)
Following the 2008 crisis, an investor screens beaten-down regional banks using the Graham Number, focusing on low P/E and low P/B with solid balance sheets.
✨ Outcome：Buys underpriced bank shares. Over the next five years, selected banks roughly double as valuations normalize and credit losses recede.

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