How to Calculate the Intrinsic Value of a Stock like Benjamin Graham! (Step by Step)

having the ability to calculate the intrinsic value of a stock has been the key to success for many of the top investors in the world such as warren buffett in one of the top investing books of all time the intelligent investor benjamin graham laid out a formula that he used in order to calculate the intrinsic value of a stock in today's video i'm going to be taking you step by step on how to calculate the intrinsic value of a stock using graham's formula okay so now we're ready to start building out our model using graham's formula which will lead us to the intrinsic value of the stock and you can see here over to the side i've listed what each of these metrics here stands for and as i build out this model i'm going to kind of talk about what each of these things stands for so the first thing i'm going to do is i'm going to create an area just to kind of give my model a title and let me know what model i'm using and i'm just going to title this graham's valuation since we are using his model to build out this valuation and the first thing we need to know obviously is what stock we're going to be looking at and so for this example let's go ahead and say that we're going to look at apple to find the intrinsic value of apple using grams formula and as you can see here the first thing that we need to do is we need to know the earnings per share of the company so let's make an area for earnings per share the next thing is this 8.5 right here which if we come over here we can see this is the price to earnings base for a company that has no growth so i'm going to list that out here and we're just going to say price to earnings no growth and we know that this will be 8.5 according to graham's formula and when we come over here we can see 2g so this g is going to stand for the growth rate for typically over about the next five years so i'm going to list two things here i'm just going to type out growth rate and then i'm going to list out below this to g and i'll come back to this 2g and talk a little bit about this more later then we can see here there's a 4.4 here and we can see that this is the average yield of the aaa corporate bonds and this was the average yield during graham's time but it's also applicable still today so let's go ahead and list this out here see if i can spell correctly and then the final thing in this formula is we need to know what y stands for so y stands for the current yield of the aaa corporate bonds and that'll be something that we have to look at look up as it changes constantly and so now we have all the metrics that we need to start filling out our valuation so the very first piece of data that we're going to need about apple in order to come to this valuation is we need to know its earnings per share so there's a couple different ways that we can find the earnings per share the first way we could do it is if we just go to google we can go to yahoo finance and we'll pull it up here and if we come up here to the top we can just search for apple and we'll pull up apple and now we have a page that has some data on apple we want to find its earnings per share for the trailing 12 months and if we look right here here it is right here so we can see that it is 5.11 so if we come back here you can put in 5.11 right here but another quick way that you can do this in google sheets is use the google finance function and if we do google finance and select apple and just type in earnings per share we can see that this will automatically fill in so let's say i were to change the stock right here and put in verizon verizon's earning per share will automatically fill in so it's kind of up to you how you do that part but that's just a cool way you can automatically pull up the earnings per share and kind of automate the whole valuation process so we can see here the next thing that we want is our price to earnings for a no growth company and benjamin graham went ahead and did the hard work and found this number to be 8.5 so if you're going to use this formula that's a number that will stay consistent so we can just put 8.5 right here and the next thing i need to do is fix the way i spelt this and okay so now we need to know our growth rate so he went ahead and made the growth rate 2g so this g stands for growth rate so we're going to go back to yahoo finance and the growth rate is not listed on this page right here but if we come over here to analysis and click on this we can scroll down here and we can see for about the next five years we can see the growth rate and we can see that analysts are predicting apple have a growth rate at about 17.93 percent and so this is kind of a number that's up to yourself so if you feel like that's too high or too low this is an adjustable number because this is a prediction about the future for the sake of this model i'm going to go ahead and go with what the yahoo finance analyst believe it'll be which is 17.93 this 2g is just the multiplier for this growth rate so this is just simply going to be 2. and then we need to know the average yield of a aaa bond which for this formula is sitting at 4.4 that's kind of the average for all time but the last thing that we need to know is what y stands for the current yield of the aaa corporate bonds so we need to go back and we need to search for the current yield of a aaa corporate bond so i'm just going to type this in google and we can see right here i'm going to pull it up and we want to make sure we have the most up-to-date data on this so let's go here and we can see here this is the official economic data and we want to know the a corporate bond yield and if we look right now we can see it is currently 2.57 and this is something that changes somewhat frequently so it's important to come back and look at this data once you update your model and so we're going to put 2.57 right here and now we have all the data that we need in order to calculate the intrinsic value of apple but before we do that we want to make sure that this is a reusable model so i want to go ahead and highlight everything in this model that may change in the future so for example the earnings per share is going to change in the future so let's go ahead and highlight this and we know that this 8.5 won't change because it's consistent with the formula this growth rate will definitely change in the future so we want to highlight this as well r2 here won't change because that is our multiplier for the growth rate our 4.4 will not change because that's consistent with the formula but why our current yield of the triple-a corporate bond will most definitely change in the future so we want to highlight this as well and now we want to come down here and we actually want to start to calculate the intrinsic value of this stock and so we are going to use this data that we have already gathered and we are going to plug it into graham's formula so we are going to start with the equal sign and open this parenthesis and the first thing we need is our earnings per share and we want to take this and we want to multiply it and have another open parenthesis and we're going to take our 8.5 here and add that to these two numbers here multiplied together so we'll take our 17.93 multiply this by 2 and then we're going to close two parentheses here and then we want to multiply all of this and we want to multiply it by our 4.4 and let's close this parentheses and then the final step is we want to divide all of this by our current yield of the aaa corporate bonds our y value so we'll do divide and divide it by 2.57 and when we hit enter we can see that we currently have our intrinsic value of apple based off of our formula and our model that we put in and now we have our intrinsic value calculated but we actually want to take this a step farther so we want to know what our margin of safety is so that we can make a decision if we should be buying or selling this stock so let's go ahead and box off this area on its own and we'll scroll down and we will quickly make a new area and here we want to know what the current price of the stock is we want to know the difference and we need a margin of safety and then we need to know what are acceptable buy prices and we'll go ahead and center this text as well and so for the current price this is something we could just look up on google again but i'm going to go ahead and use the google finance formula again to do this and have it refer back to apple and this give us this gives us apple's current share price and so what i need to do now is i need to know the difference in the current price and the intrinsic value so all i'm going to do is i'm going to take the current price and divide it by the intrinsic value and here we can see we want to make this a percentage so the difference in these prices is 37.58 percent so the current price is only 37.58 of the intrinsic value of this stock and let's say that our margin of safety is about 65 so based off this we want to know what are acceptable by prices so we want to take our 65 percent and we want to multiply that by the intrinsic value of this stock and we can see based on this data our acceptable buy price is going to be 252 or anything below that and the last thing that i want to do to this model is i want to add an area that tells me buy or sell so i want to automate this spreadsheet to where it will automatically tell me if i should be buying or selling this stock based off the variables that we put in up here so to do this we are going to use an if statement and we want to say if our acceptable buy price is less than the intrinsic value then we want it to say buy and if not we want it to say sell and we hit enter here we can see it says to buy the stock right now let's go ahead and format this to make it look better and box this off so now we have a model based off of graham's formula that is calculating the intrinsic value of apple and it's also giving us a signal as to whether we should be buying or selling apple based on our margin of safety and one of the things that you'll notice about this model is our intrinsic value is currently much higher than the current price of apple and so this actually leads me to want to talk about one of the drawbacks of this formula so many investors today believe that the growth part of the formula which is this 8.5 plus 2g is far too aggressive and a more realistic price to earnings base for a no growth company instead of 8.5 should actually be 7 and instead of 2g for a growth multiplier it should actually be 1g so what they've done is they have created a revised formula with those changes that i just mentioned so what i'm going to do is i'm actually going to take that revised formula and i'm going to build out a model identical to the one that we just made and we will compare the two together okay so i've jumped ahead and we can see over here to the right i have built out a model based on graham's revised evaluation formula so over here to the left we have the old formula that we just used and the only changes that i've made on this side are formatting changes so all the numbers are still the same we can see we still have our same intrinsic value and here to the right we can see really the only changes with this revised valuation formula instead of the price to earnings of a company with no growth being 8.5 is it's now 7. and instead of a 2g multiplier over here we now have a 1g multiplier and when we take a look at the intrinsic value of the two there's a large difference so in our original formula we can see that the intrinsic value came out to 388 dollars per share but on the revised formula which is used more today we can see that our intrinsic value is 218 dollars per share so we can see just how much of a difference that this small revision can actually make and when we come down to our margin of safety area we can see we kept the same 65 percent margin of safety and when we take a look at our acceptable buy price for our revised formula it's 141 dollars per share which is actually less than the current price so based on our margin of safety this is not a time that we would want to be buying apple stock and when we compare this with the original valuation we can see that would be a time we want to buy the stock so you can see just how big of a difference that the two formulas can make so let's go ahead and do one more example and what i've done is i have automated both of these models to where all we need to do is update the data that is in the yellow squares and our model will update automatically so let's say that we want to take a look at verizon so the first thing we need to do is we will just list verizon stock ticker here and verizon stock ticker here and we can see that our earnings per share has already filled in automatically the next thing we need to do is we need to find the projected growth rate of verizon so let's go back over to google and we will go to yahoo finance and we need to find the growth rate so we'll put in their ticker here and we will search for verizon communications and we will come over here to analysis and if we scroll all the way near the bottom we can see that their projected growth rate is going to be 3.17 percent so let's go back to our model and we will put in 3.17 for the growth rate and we can see here our current yield on triple-a corporate bonds we just looked that up earlier so we know that hasn't changed and i don't want to change my margin of safety right now i think i want to keep that the same so we can see based off the data that we just put in we already have our intrinsic value calculated in both of these models we can see with graham's original evaluation formula the intrinsic value is 122 dollars per share and with the revised valuation formula we get an intrinsic value of 84 dollars per share and when we take a look at our margin of safety it's kind of the same thing as the apple stock based on the original valuation this would be a time we want to be buying the stock and based on our new valuation which is the revised formula we can see this is not a time that we would want to be buying the stock keep in mind that no valuation model is perfect and what we really want to shoot for when creating financial models is a range where we think the intrinsic value of the stock falls into always do your due diligence when making an investment decision and keep in mind that i'm not a financial advisor i hope this video has helped show you how to calculate the intrinsic value of a stock using benjamin graham's formula if you'd like to be able to download this model that i've built in google sheets then you can head to my patreon page at the link in the description so that being said thank you guys so much for watching and please don't forget to like and subscribe to the channel

Channel: Dividendology

Views: 570,222

Keywords: intrinsic value of a stock, how to calculate intrinsic value of a stock, how to find the intrinsic value of a stock, how to calculate the intrinsic value of a stock, intrinsic value calculation, intrinsic value of a stock calculation, how to value stock, how to value a company, how to calculate the intrinsic value of a stock warren buffet, benjamin graham intrinsic value, benjamin graham intrinsic value formula, how to calculate the intrinsic value of a stock like benjamin graham

Id: 8jmjxXc5H8c

Length: 16min 20sec (980 seconds)

Published: Thu Aug 12 2021