Monday, November 7, 2011

The Magic Multiple

Benjamin Graham spent decades analysing thousands of companies and documented the values investing framework. He introduced a new multiple at a later stage to make life easy for investors who want to pick potential winners from a large number of stocks. He gave the following formula to calculate this magic multiple:

Magic Multiple = Price Earning Ratio (PE) * Price to Book Ratio (PBV)

This multiple helps avoid confusion when one ratio indicates that a stock is cheap while the other shows that it is costly.  

As a investor Graham was not comfortable investing in stocks where PE ratio was more than 15 and PB ratio was more than 1.5, and therefor advised investors to concentrate only on the stocks where this magic multiple is less than 22.5

1 comment:

  1. Can you please explain with examples like
    1. Infosys
    2. Yes Bank
    3. Coal India

    What is the Magic Multiples for above stocks.

    \ Omprakash


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