Course 506: Great Investors: Benjamin Graham
Pay Attention to Price Multiples
In this course
1 Introduction
2 Seek a Margin of Safety
3 Favor Big Companies with Strong Sales
4 Seek Dividends
5 Choose Companies That Are in Good Financial Shape
6 Look for Companies with Sustainable Earnings Growth
7 Pay Attention to Price Multiples

Graham searched for companies with price/earnings ratios below their historical average. Moreover, he wouldn't buy a stock unless it was trading for less than 1.2 times its book value per share. (A simple equation for book value is assets minus liabilities.) So, for example, a company with $2 billion in assets and $1.6 billion in debt has a book value of $400 million. If the company has 20 million outstanding shares of stock, then the book value of each share is $20 ($400 million divided by 20 million). Using Graham's own formula, he wouldn't pay more than $24 per share for that company's stock (1.2 times the book value per share). Some may find it difficult to replicate Graham's investment style in this day and age of overvalued, profitless, and sometimes debt-ridden Internet startups. Even Buffett has said that were his mentor alive, he would have a hard time finding stocks to buy. But the father of value investing (as Graham is often called) would not have succumbed to the pressure. Even at today's price levels, Buffett insists that Graham would have found some bargains.

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