value
The two-part appraisal
The rule
Value a share as its normal earning power times a multiple you can defend from its growth, steadiness, strength and dividends.
Where it flips
But a single neat number can breed false confidence. The fix is to treat the appraisal as a rough range, lean careful on both earnings and the multiple, and demand a safety margin below it.
Graham's simple method is on purpose humble. Estimate what the company can earn in a normal year. Then apply a multiple you can defend from its quality, higher for steady, strong, growing firms, lower for fragile ones. It will never be exact. But it gives a careful anchor to compare against the market price, so you buy only with a comfortable gap.
A worked example
A firm earns about ₹20 a share in a normal year. Given decent but not amazing quality, Aayra applies a 12 times multiple, giving about ₹240 of value. With the price at ₹180, there is a real cushion. At ₹360 there is none. [illustrative]
How to spot it
- ·no estimate of normal earning power
- ·a multiple with no reason behind it
- ·a price accepted without an appraisal to compare
Benjamin Graham · The Intelligent Investor