GRAHAMS EQUATION FOR FAIR VALUE OF A STOCK

Benjamin Graham's principles of value investing serve as the basis for the maximum price an investor should pay for a stock. A strategy based around locating undervalued stocks was the safest, surest way to thrive in a turbulent market. He mastered the concept of margin of safety, the difference between a stock's intrinsic value and market price, making it the keystone of his philosophy.

It's derived using only two data points: current earnings per share and current book value per share. Fair Value of a Stock = Square Root of [ (22.5) x (Earnings Per Share) x (Book Value Per Share) ]

For Graham, price-to-earnings (P/EPS) ratio should be no more than 15 and price-to-book value (P/BVPS) ratio should never exceed 1.5. As a general rule, Graham insisted that the product of the two shouldn't be more than 22.5. In other words, (P/EPS of 15) x (P/BVPS of 1.5) = 22.5.

     Note: use trailing twelve months (ttm) EPS