Where these formulas come from
Benjamin Graham — Warren Buffett's teacher and the father of value investing — published his intrinsic value framework in The Intelligent Investor and refined it in later editions of Security Analysis. His goal was never precision. It was a conservative ceiling: a price above which a defensive investor simply refuses to pay, no matter how good the story sounds.
The revised formula: V = EPS × (8.5 + 2g) × 4.4 / Y
Each piece has a meaning:
- 8.5 — the P/E Graham assigned to a company with zero growth. Everything above that is what you pay for growth.
- 2g — each percentage point of expected 7–10 year growth adds two turns of P/E. This is the aggressive part of the formula: at 15% growth it permits a 38.5× multiple.
- 4.4 / Y — 4.4% was the average AAA corporate bond yield in 1962, when the revised formula appeared. Dividing by today's yield Y scales the whole valuation for the modern rate environment: higher rates, lower justified prices.
The Graham Number: √(22.5 × EPS × BVPS)
The 22.5 isn't magic — it's 15 × 1.5, combining Graham's two defensive rules: never pay more than 15× earnings and never pay more than 1.5× book value. A stock can be expensive on earnings and cheap on assets (or vice versa) and still pass, as long as the combined multiple stays under the ceiling. Growth never enters the picture, which makes it the stricter of the two formulas for most modern companies.
Known limitations
- Negative earnings break both formulas. A loss-making company needs a different toolkit.
- Growth stocks get inflated values from the 2g multiplier — Graham himself warned against extrapolating high growth.
- Asset-light businesses fail the Graham Number. Software and brand-driven companies carry little book value by design; the formula will call almost all of them expensive.
- The bond-yield adjustment is from another era. It directionally captures "higher rates → lower fair multiples", but treat it as approximate.
How margin of safety protects you
Graham's core insight: your estimate of value is always uncertain, so the price must compensate you for that uncertainty. If the formula says $98 and the stock trades at $80, your margin of safety is about 18% — thin. At $65 it's 33% — comfortable. The buffer absorbs estimation error, bad luck and the occasional bad year. Cross-check any result here with the stock fair value calculator's three-model blend, or push the analysis further with the margin of safety calculator.