It was proposed by investor and professor of Columbia University, Benjamin Graham - often referred to as the "father of value investing".
[2] Graham cautioned here that the formula was not appropriate for companies with a "below-par" debt position: "My advice to analysts would be to limit your appraisals to enterprises of investment quality, excluding from that category such as do not meet specific criteria of financial strength".
[3] In Graham's words: "Our study of the various methods has led us to suggest a foreshortened and quite simple formula for the evaluation of growth stocks, which is intended to produce figures fairly close to those resulting from the more refined mathematical calculations.
In 1974, he restated it as follows:[4] The Graham formula proposes to calculate a company’s intrinsic value
[2] However, a misconception arose that he was using this formula in his daily work due to a later reprinted edition's decision to move footnotes to the back of the book, where fewer readers searched for them.
[6] Readers who continued on in the chapter would have found Graham stating: The movement of the footnote in the reprint has led to an assortment of advisers and investors recommending this formula (or revised versions of it) to the public at large — a practice that continues to this day.
"[10] Clark further explains that the formula "is to be used for estimating intrinsic value within a margin of safety which will accommodate the possibility of error in calculation.
"[10] Graham also cautioned that his calculations were not perfect, even in the time period for which it was published, noting in the 1973 edition of The Intelligent Investor: "We should have added caution somewhat as follows: The valuations of expected high-growth stocks are necessarily on the low side, if we were to assume these growth rates will actually be realized."
He continued on to point out that if a stock were to be assumed to grow forever, its value would be infinite.