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Why the difference in Instrinsic Value from the Graham Number and
posted May 07 '13 by philip
Why the difference in Instrinsic Value from the Graham Number and Value Price? Which should investors look at more?

eg. For XOM, the Graham Number is 89.62 and the Value Price is 29.21.

Also, why does it say Alert: Buy, when the XOM is 90.42, when that number
is above both the Graham Number and Value Price?

(By the way, this site is excellent!)

Thanks in advance.

Both Value Price and Graham Number are attempts to calculate true
posted May 08 '13 by alex
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.

Does it make sense?

Alert versus the Graham Number and Value Price
posted May 08 '13 by alex
Alert versus the Graham Number and Value Price

On stock2own.com you can find elements of two distinct types of analysis - fundamental and technical. Some people are using fundamental analysis only, other technical analysis only, but there are many investors who are using some sort of mix.

I like to think about it like this: we are using fundamental analysis to identify the stock to invest in and we are using technical analysis to find the best time to act - buy or sell.

To have a functional understanding of finance, it is essential to thoroughly understand balance sheets, income statements and cash flow statements - this is what Fundamental analysis does. Value price estimates would be a good example of the result of fundamental analysis. Usually, it has nothing to do with the current market price of a stock.

As an opposite, technical analysis is the study of market action, primarily through the use of charts, for the purpose of forecasting future price trends. In its purest form, technical analysis considers only the actual price behavior of the market or instrument, based on the premise that price reflects all relevant factors before an investor becomes aware of them through other channels. Technicians say that a market's price reflects all relevant information, so their analysis looks more at "internals" than at "externals" such as news events. Price action also tends to repeat itself because investors collectively tend toward patterned behavior - hence technicians' focus on identifiable trends and conditions.

So, to answer your question - Alert “Buy” or “Sell” has nothing to do with the value price estimate. Alerts are based on technical analysis and designed for only one purpose - to help you manage the timing, to help investor identify time to buy or sell. Bull or Bear image shows current market condition for the selected stock and alert summarizes individual alerts of all presented price charts: moving averages, stochastic and MACD. This is just an oversimplified way of putting 3 large chart into one small cell.

Thanks! This helps.
posted May 08 '13 by philip
Thanks! This helps.

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