1. Who Was Benjamin Graham?
Benjamin Graham (1894–1976) was a British-born American economist, professor, and investor widely known as the "father of value investing." His two books — Security Analysis (1934) and The Intelligent Investor (1949) — are considered the foundational texts of fundamental analysis.
Graham taught at Columbia Business School, where one of his students was a young Warren Buffett. Buffett has repeatedly credited Graham's teachings as the single most important influence on his investment philosophy, calling The Intelligent Investor "the best book about investing ever written."
Graham's central thesis was simple but revolutionary: every stock has an intrinsic value that can be calculated from its fundamentals. When the market price is significantly below this intrinsic value, the stock is a good buy. When it's significantly above, it's overpriced. The difference between price and value creates what Graham called the margin of safety.
2. The Fair Value Formula Explained
Graham developed several valuation approaches throughout his career. The formula used on WIT is his intrinsic value number, derived from earnings and book value:
Graham's Fair Value
Fair Value = √(22.5 × EPS × BVPS)
Where:
- EPS = Earnings Per Share (trailing twelve months)
- BVPS = Book Value Per Share (total equity ÷ shares outstanding)
- 22.5 = Graham's constant (explained below)
Where does 22.5 come from? Graham believed a conservatively valued stock should have a P/E ratio no higher than 15 and a Price-to-Book ratio no higher than 1.5. Multiplying these two ceilings gives 15 × 1.5 = 22.5. The square root normalizes the product back to a per-share price.
3. Breaking Down the Components
Earnings Per Share (EPS)
EPS tells you how much profit a company generates for each share of stock. It's calculated as net income divided by the number of outstanding shares. A higher EPS generally indicates a more profitable company. Graham used trailing EPS (based on actual reported earnings over the past 12 months) rather than forward estimates, because real numbers are more reliable than forecasts.
Book Value Per Share (BVPS)
BVPS represents the net asset value of a company on a per-share basis. It's calculated as total shareholders' equity divided by the number of outstanding shares. In Graham's view, book value provides a floor for the stock's worth — even if a company were liquidated, shareholders should theoretically receive at least the book value.
Why Both Metrics Together?
Graham used both EPS and BVPS because they capture two different dimensions of value. EPS reflects the company's earning power — its ability to generate profits. BVPS reflects its asset backing — the hard assets standing behind each share. A stock that scores well on both metrics is profitable and backed by tangible value, which Graham considered the hallmark of a sound investment.
4. Worked Example
Let's walk through a hypothetical example. Suppose Company XYZ has the following metrics:
Step 1: Multiply the components inside the square root:
22.5 × $3.50 × $28.00 = $2,205.00
Step 2: Take the square root:
√$2,205.00 = $46.96
Step 3: Compare to the current price:
Upside = ($46.96 − $45.00) / $45.00 = +4.4%
In this example, the fair value ($46.96) is slightly above the market price ($45.00), suggesting the stock is roughly fairly valued with a small upside of 4.4%. Graham would typically want a much larger margin (25-50%) before considering a purchase.
5. The Margin of Safety Concept
Graham's most famous principle is the margin of safety — the idea that you should only buy a stock when its price is significantly below your estimate of its intrinsic value.
Why? Because all estimates are imperfect. Earnings can decline, assets can lose value, and unexpected events happen. By demanding a large discount to fair value, you create a buffer that protects your investment even if your analysis is partially wrong.
Graham's Rules of Thumb
- • Strong buy: Price is 30-50% below fair value (large margin of safety)
- • Fairly valued: Price is within 10% of fair value
- • Overvalued: Price exceeds fair value by more than 10%
- • Significantly overvalued: Price exceeds fair value by 50%+ (potential sell signal)
On WIT, when you view a stock's Graham's Fair Value section, you'll see the upside/downside percentage. A positive number means the stock is trading below fair value (potential opportunity). A negative number means it's trading above (potentially overvalued).
6. Limitations and When NOT to Use It
Graham's formula is powerful but not universal. It works best for certain types of companies and poorly for others:
❌ Doesn't work for growth stocks
Companies like Amazon, Tesla, or early-stage tech firms often have low or negative EPS and minimal book value relative to their growth potential. The formula would severely undervalue them.
❌ Doesn't work for companies with negative earnings
If EPS is negative, the formula produces no result (you can't take the square root of a negative number). Many turnaround plays and startups fall into this category.
❌ Ignores intangible value
The formula relies heavily on book value, which may miss the value of brands, software, patents, and network effects — assets that don't appear (or are underrepresented) on the balance sheet.
✅ Works well for mature, profitable companies
Banks, utilities, industrial conglomerates, consumer staples, and large-cap dividend payers — companies with stable earnings and substantial tangible assets — are ideal candidates for Graham's formula.
7. Using Graham's Fair Value on WIT
WIT automatically calculates Graham's Fair Value for every stock that has positive EPS and positive BVPS. Here's how to find and interpret it:
- Search for any stock on the dashboard using the search bar.
- Scroll to "Graham's Fair Value" on the stock detail page. You'll see three numbers: the current price, the calculated fair value, and the upside/downside percentage.
- Look for green upside numbers: A positive upside (e.g., +25%) means the stock is trading below its Graham fair value — it may be undervalued.
- Cross-reference with other metrics: Never rely on a single metric. Check the P/E ratio, debt levels, revenue trends, and profit margins alongside Graham's value.
Remember: Graham's Fair Value is a starting point for analysis, not a definitive answer. Use it as one tool in your toolbox alongside other valuation methods, qualitative research, and your own judgment.