Both Value Price and Graham Number are attempts to calculate true intrinsic value of a business. The methodologies and formulas are quite different and this is what makes it interesting – ability to see evaluations of the same thing (intrinsic value) calculated differently. It allows to see the same thing from a different angles.
This is like using wireless signals to pin point a cell phone location. It is never enough to have just one signal, but if you have 3 or more signals, you can compute a location relatively good. This is what we are trying to achieve using different methodologies.
So what is the difference?
Value price is based on the approach described the best by Phil Town in his book “Rule #1”:
“The Sticker Price of any business is based on its future EPS and future PE. In other words, if we can figure out what a company’s future EPS and PE numbers are going to be in, say, ten years, we can multiply those two numbers together and determine its future price in ten years and than, from that, work backwards to determine its Sticker Price today.”
There are 3 projections computed in stock2own: pessimistic, moderate and optimistic. The difference between them is described in details in the Theory section:
I think it is wise to use different projections in different times: we may use an optimistic approach in a bullish time, while in a downturn it is better to be more pessimistic. Different people may have different risk tolerance, different objectives and different investing styles and therefore may found one or another projection type more suitable for them. I, personally, love to see all three numbers and compare them visually to see how big the difference is. If the difference is relatively small it makes me think that business is fairly predictable, at least analysts expectations are in sync with the numbers. Understanding of how similar the projected numbers are gives me extra confidence or makes me extra cautious if the numbers differ a lot.
Now the Graham Number.
The Graham number or Benjamin Graham number is a figure used in securities investing that measures a stock’s fair value and named after Benjamin Graham, the founder of value investing. The formula itself is rather simple, BUT as Benjamin Graham explained in his book, he would not recommend to use it blindly and apply for every business. There are certain criteria must be met in order to use this formula successfully. I think most important criteria is investor must think of himself as a “defensive investor” in Graham’s terms. You can read more about it in the Fundamental Analysis section:
As you can see, different methodologies are using different approach for value or intrinsic price estimation. I think it is safe to say that there is no single universal formula exist. Therefore at stock2own we are trying to add more than one approach and let investor decide which one to use and to what extent.
In general, when I see that all numbers are agree to each other, in other words they are on the same ballpark, it gives me higher confidence in the estimate. If I see that numbers are quite different, I have to dig dipper and carefully analyze all numbers and other aspects of a business to reach the same level of confidence in one of those estimates.