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Guru Models

Benjamin Graham Model

Introduced in 2014, this valuation model is a method of determining buying and selling points in a company’s stock through the determination of a central value as well as an upper and lower valuation range based on historical interest rate and fundamental data. Graham estimated the central value, or fair value, of a stock by capitalizing the average earnings per share over the previous “α” years by an “equilibrium” multiplier equal to 1 divided by k-times the yield on AAA-rated corporate bonds. Graham then established lower and upper price bounds equal to 80% and 120% of the central value estimate respectively. In Graham’s original model α=10 and k=2. That is, he capitalized a firm’s 10 year average earnings at 1 divided by twice the AAA-rated corporate bond yield. While this approach is intuitively sound, based on our experience it does not always yield the most satisfactory results. To determine the values of “α” of “k” for our model results, we rely on an optimization procedure that varies the parameter value “k” one-by-one for each of the current year, 3-year, 5-year and 10-year moving average EPS series until “k” converges on a “best fitting” series. In addition, for our model results, we do not simply rely on the average AAA-rated corporate bond yield in the broad market, we rely on the effective bond yield of the company’s own debt issues. 

Benjamin Graham Model: Methodology Report

Other Models*

  • Buffett-Munger Model
  • Katsenelson Model
  • Domash Model

*These models are available to institutional clients only. Please contact customerservice@seensco.com for additional details.