In September 1974, Benjamin Graham published a new formula according to which the market was significantly undervalued. Like the old Central Value formulas, his new formula contained an interest rate factor. Unlike the old formulas, it also contained a factor reflecting the “expected growth rate over the next seven to ten years” — based, however, on an historical growth rate.

Although Graham recognized that inflation was the principal cause of the recent increase in interest rates, he did not allow for it in translating from past to future growth. In an inflationary environment, the author argues, it is a mistake to use an historical growth rate and then discount by current interest rates. He provides several methods of selecting a growth rate that will reflect the current inflation, and tests them against recent market experience.