Graham Number

The Graham Number is a conservative fair value estimate derived from Benjamin Graham's criteria in "The Intelligent Investor." It calculates the maximum price a defensive investor should pay, based on the constraint that P/E should not exceed 15 and P/B should not exceed 1.5.

The formula - square root of (22.5 x EPS x BVPS) - mathematically enforces both constraints simultaneously. The constant 22.5 equals 15 x 1.5, the product of Graham's P/E and P/B ceilings.

Stocks trading below their Graham Number pass Graham's valuation test. The ratio of price to Graham Number (Price/Graham) quantifies how far the stock is from this threshold. A Price/Graham below 1.0 meets the criteria; further below offers a larger margin of safety.

A stock trading below its Graham Number is considered undervalued by Graham's defensive standards. The larger the discount, the greater the implied margin of safety.

The Graham Number is a blunt instrument by design. Graham intended it as a conservative filter that sacrifices precision for safety. Stocks passing this screen tend to be mature, asset-heavy companies with stable earnings.

Growth companies with low book value (high P/B) or volatile earnings (high P/E) will rarely pass the Graham Number test. This is by design - Graham's defensive strategy explicitly avoids such stocks.

The Graham Number works best for industrial, financial, and utility companies where book value is economically meaningful. Banks trading below their Graham Number are often genuine bargains in stable credit environments.

Technology and healthcare companies rarely pass the Graham Number test because their intangible-heavy business models produce high P/B ratios. This does not mean they are overvalued - just that they fall outside Graham's deliberately conservative framework.

In Japanese and South Korean markets, the Graham Number screen historically surfaces many candidates due to lower average P/B ratios and conservative balance sheet management.