Benjamin Graham Value Investing Formula: What the Data Tells Value Investors
The benjamin graham value investing formula is not a single equation but a system of principles with quantitative expression points. Graham described his approach across two major books, "Security Analysis" (1934) and "The Intelligent Investor" (1949), and the formula most associated with his name uses earnings per share and book value per share to compute a maximum defensible purchase price. Understanding where the formula works and where it fails tells you as much about value investing as the formula itself.
This data analysis applies Graham's criteria to current market data and shows what it finds.
Key Takeaways
- Graham's core formula, square root of (22.5 times EPS times Book Value Per Share), sets a ceiling price combining his 15x P/E and 1.5x P/B limits.
- The formula was designed for the market conditions of 1934 to 1972. Its direct application to modern asset-light businesses produces systematically low intrinsic values.
- Berkshire Hathaway (BRK.B) at P/E 9.8 and P/B 1.5 is one of the few large-cap businesses where Graham's original formula produces a number that aligns with reasonable market prices.
- Johnson & Johnson (JNJ) at P/E 15.4 passes Graham's earnings test but fails the book value test at typical P/B multiples above 5x.
- The margin of safety principle, buying at a meaningful discount to computed intrinsic value, is the lasting contribution. The formula is the container; the margin of safety is the content.
- ValueMarkers tracks 120+ indicators, including P/B and P/E relative to 10-year history, to apply Graham's price discipline across 73 global exchanges.
Graham's Two Core Formulas
Graham produced two distinct valuation formulas across his career, and distinguishing them matters for anyone who wants to apply his work precisely.
The first formula appears in "Security Analysis" and addresses what Graham called "net current asset value" or NCAV. It computes the liquidation value of a business by taking current assets, subtracting all liabilities, both current and long-term, and comparing the result to the market capitalization. A company trading below its NCAV is selling for less than its cash and near-cash assets, net of everything owed. Graham found these "net-nets" in abundance during the Great Depression and they formed the backbone of Graham-Newman's record.
The second formula, the one most commonly called the "Graham Number" today, appears in "The Intelligent Investor" and addresses the defensive investor's maximum purchase price. It is derived from Graham's combined criterion: P/E no greater than 15 and P/B no greater than 1.5, whose product is 22.5.
Graham Number = square root of (22.5 x EPS x Book Value Per Share)
Both formulas are expressions of the same underlying principle: pay less than what you can independently verify the business is worth.
The Data: Applying Both Formulas to Current Stocks
Running the Graham Number formula on a cross-section of well-known stocks produces a stark picture of where the formula works and where it does not.
| Stock | EPS (TTM) | Book Value/Share | Graham Number | Current Price | Premium/Discount |
|---|---|---|---|---|---|
| BRK.B | ~$18.40 | ~$245 | ~$318 | ~$360 | +13% above |
| JNJ | ~$8.50 | ~$26 | ~$70 | ~$155 | +121% above |
| KO | ~$2.45 | ~$5.00 | ~$16.60 | ~$70 | +322% above |
| AAPL | ~$6.80 | ~$3.80 | ~$24.10 | ~$230 | +855% above |
| MSFT | ~$12.90 | ~$39 | ~$106 | ~$425 | +301% above |
The table reveals the formula's domain boundary clearly. BRK.B is the only name here that comes anywhere close to clearing Graham's original criteria, and even it trades at a modest premium to the Graham Number. KO, AAPL, and MSFT are so far above the Graham Number that the formula is simply the wrong tool.
This is not a failure of Graham's thinking. It reflects that the businesses have changed. Apple (AAPL) at a ROIC of 45.1% earns more than $45 for every $100 of invested capital. No formula based on book value can capture that unless you adjust the book value input to reflect the economic asset the company has actually built.
The NCAV Screen: Where Graham's First Formula Still Finds Value
The net current asset value screen is harder to apply today but not impossible. Across 73 exchanges, ValueMarkers covers markets where asset-heavy small-cap businesses sometimes trade below NCAV during sector-level distress.
The calculation:
NCAV per share = (Current Assets - Total Liabilities) / Shares Outstanding
Graham's rule: only buy when the stock price is at or below 2/3 of NCAV.
In developed markets, NCAV opportunities appear most frequently in:
- Post-bankruptcy restructurings where equity carries a stub value below net assets
- Commodity businesses during troughs when inventory and receivables exceed market cap
- Japanese small-caps, which have historically traded near or below NCAV due to corporate governance norms that historically prioritized balance sheet accumulation over shareholder returns
The NCAV screen does not find wonderful businesses. It finds deeply unpopular businesses. The discipline required is accepting that many will stay cheap for longer than expected, some will deteriorate, and the gains come from the subset that recovers. Graham ran this as a portfolio strategy, not as a concentrated bet.
The Margin of Safety in Numbers
Graham's most important contribution is not the formula. It is the margin of safety concept, which defines the gap between price and value that protects an investor against analytical error.
If Graham's formula produces an intrinsic value of $50 and the stock trades at $30, the margin of safety is 40%. Graham recommended a minimum of 33% for defensive investors and accepted wider margins for smaller, less-analyzed businesses.
The math behind the margin of safety is straightforward. If your intrinsic value estimate is wrong by 20% in either direction (a realistic uncertainty range for any valuation), a 40% margin of safety absorbs that error and still leaves you with a profitable outcome. A 10% margin of safety requires near-perfect analysis to produce a positive return.
| Intrinsic Value Estimate | Margin of Safety | Maximum Purchase Price | Protection Against |
|---|---|---|---|
| $100 | 33% | $67 | Moderate analytical error |
| $100 | 50% | $50 | Significant analytical error |
| $100 | 20% | $80 | Minor deviation only |
| $100 | 0% | $100 | No protection |
The question of "how much margin of safety is enough" depends on your confidence in the underlying estimate. For a business with stable earnings and a transparent balance sheet, 25-30% may be sufficient. For a cyclical business where earnings could halve in a recession, 50% or more is the appropriate buffer.
When Buffett Started Investing and How He Modified Graham
Warren Buffett began investing at age 11 and studied under Graham at Columbia Business School in the early 1950s. He managed partnerships from 1956 to 1969 applying Graham's NCAV and deep value approaches, and the results were exceptional.
The modification came from Charlie Munger and Philip Fisher. Munger argued that holding a wonderful business at a fair price indefinitely beats buying a mediocre business at a cheap price and then selling when it reaches intrinsic value. The math supports this: a business earning 30% ROE that retains and reinvests its earnings doubles every 2.4 years. Graham's original framework, focused on asset-level cheapness, would have sold out of such a business when the stock reached book value.
Buffett has said his evolution was from "Graham to a Phil Fisher-influenced approach with heavy Munger influence." The benjamin graham value investing formula remains the foundation, specifically the discipline of computing an independent estimate of value and refusing to pay above it. The evolution was in what counts as "value."
The Book Value Problem in Modern Markets
Book value per share, the denominator in the Graham Number, is a GAAP accounting construct that reflects historical cost of assets minus accumulated depreciation, plus any retained earnings. It was a reasonable proxy for liquidation value in 1934 when most large companies held physical assets.
In 2026, the largest companies by market cap are primarily intangible-asset businesses. Apple's brand, iOS ecosystem, and developer relationships do not appear on its balance sheet at anything close to their economic value. Microsoft's Azure infrastructure and enterprise software relationships are similarly invisible to book value accounting.
This is why AAPL's book value per share is approximately $3.80 while its market price is around $230. The accounting says the assets are worth $3.80 per share in retained equity. The market says the assets, properly including all intangibles, are worth 60x that.
Graham understood this limitation and would not have applied the formula to businesses where intangible value dominated. He specifically said his methods were designed for the "defensive investor" who needed to avoid catastrophic mistakes, not for the sophisticated investor willing to do qualitative research. Modern investors who apply the Graham Number to AAPL and conclude it is overpriced are misapplying the tool.
Practical Application: A Graham-Inspired Screen for 2026
A screening process that honors Graham's principles without mechanically applying his 1934 formula would include these steps.
First, screen for P/E below the market median, currently around 22-24 for the S&P 500. This does not mean buying everything below that level; it means starting the search there.
Second, screen for P/B below 2.0 for asset-heavy industries, and accept higher P/B for asset-light businesses only when ROIC is above 20%.
Third, apply a debt filter: net debt below 3x EBITDA for cyclical businesses, below 1.5x for capital-intensive ones.
Fourth, require the business to have been profitable in at least 7 of the last 10 years. Graham's criterion was that the business must have "adequate" earnings power consistently, not just in the most recent reporting period.
Fifth, require a minimum dividend history. Graham preferred businesses that paid dividends for at least 20 years. In today's market, consistent buyback programs substitute for dividends often, but the principle of cash returned to shareholders remains sound.
Our guru tracker tracks which investors who built their records on Graham-style discipline own right now, which gives you a real-time view of where the modern heirs of this approach are finding opportunities.
Further reading: SEC EDGAR · Investopedia
Why graham intrinsic value formula Matters
This section anchors the discussion on graham intrinsic value formula. The detailed treatment, formula, and worked examples appear in the body of this article above. The points below summarize the most important takeaways for value investors who want to apply graham intrinsic value formula in real portfolio decisions. ValueMarkers exposes the underlying data on every covered ticker via the screener and stock profile pages, so the concepts in this article translate directly into actionable filters.
Key inputs for graham intrinsic value formula
See the main discussion of graham intrinsic value formula in the sections above for the full treatment, including the inputs, the calculation methodology, the typical sector benchmarks, and the most common pitfalls to avoid. The ValueMarkers screener lets value investors filter the full universe of 100,000+ stocks across 73 exchanges using graham intrinsic value formula alongside the rest of the 120-indicator composite, with sector percentiles and historical trends shown on every stock profile.
Sector benchmarks for graham intrinsic value formula
See the main discussion of graham intrinsic value formula in the sections above for the full treatment, including the inputs, the calculation methodology, the typical sector benchmarks, and the most common pitfalls to avoid. The ValueMarkers screener lets value investors filter the full universe of 100,000+ stocks across 73 exchanges using graham intrinsic value formula alongside the rest of the 120-indicator composite, with sector percentiles and historical trends shown on every stock profile.
Related ValueMarkers Resources
- Pb Ratio — Glossary entry for Pb Ratio
- Graham Number — Graham Number captures how cheaply a stock trades relative to its fundamentals
- Pe Ratio — Glossary entry for Pe Ratio
- Mason Graham Number — related ValueMarkers analysis
- Benjamin Graham Stock Valuation Formula — related ValueMarkers analysis
- Warren Buffett Strategy How The Oracle Of Omaha Builds Wealth — related ValueMarkers analysis
Frequently Asked Questions
when did warren buffett start investing
Warren Buffett bought his first stock, six shares of Cities Service preferred, at age 11 in 1941. He began studying Benjamin Graham's framework at Columbia Business School in the early 1950s and worked for Graham-Newman Corporation from 1954 to 1956. He launched his first investment partnership in Omaha in 1956 with $105,100 from family and friends. The Buffett Partnership outperformed the Dow Jones every year from 1957 to 1969 before he wound it down and took control of Berkshire Hathaway.
what is book value
Book value is the accounting value of a company's assets minus its total liabilities, as recorded on the balance sheet. Per share, it is calculated as (Total Assets - Total Liabilities) / Shares Outstanding. Book value reflects historical cost accounting and does not adjust assets to current market value. For most modern businesses, especially technology and consumer brand companies, book value significantly understates the economic value of intangible assets such as patents, brand equity, and customer relationships.
what is a fair value gap
A fair value gap in technical analysis refers to a price range on a chart where an asset moved quickly enough that no two-sided trading occurred, creating an imbalance between buyers and sellers. This is a technical trading concept distinct from the fundamental analysis that Graham's framework addresses. In fundamental value investing, "fair value" refers to the intrinsic value of a business computed from its earnings power and asset base, not a price chart feature.
what is intrinsic value
Intrinsic value is the present value of all future cash flows a business will generate for its owners, discounted at an appropriate rate that reflects the risk of those cash flows. Graham computed a simplified version using current earnings and book value. Buffett defines it as the discounted value of cash that can be taken out of a business during its remaining life. No precise formula exists because future cash flows are estimates, which is why the margin of safety principle matters: the gap between price and estimated intrinsic value absorbs errors in the estimate.
how to calculate intrinsic value of share
The most common method is a discounted cash flow analysis: project free cash flow for 5-10 years, estimate a terminal value, and discount both at the weighted average cost of capital or required return rate. Graham's simplified version uses the formula: square root of (22.5 x EPS x Book Value Per Share) as the maximum price for a defensive investor. Our DCF calculator at ValueMarkers offers four DCF model variants so you can cross-check your estimates against multiple methodologies before investing.
how does value investing work
Value investing works by buying assets for less than they are worth and waiting for the price to reflect the underlying value. Graham identified that markets periodically price businesses far below their intrinsic value due to pessimism, neglect, or forced selling. Investors who can independently estimate value and maintain the patience to wait for prices to converge can generate superior long-term returns. The method requires accurate valuation, patience across years-long holding periods, and the emotional discipline not to sell during periods of underperformance.
Examine how Graham's principles translate into a systematic workflow with our guru tracker, which shows the portfolios of value investors who have built long-term records applying these criteria.
Written by Javier Sanz, Founder of ValueMarkers. Last updated April 2026.
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