Intrinsic Value – Beginning Investing Terms
Posted on | February 4, 2010 | No Comments
Intrinsic value may be the most important concept in value investing. It is the foundation of everything else. Value Investors all agree that you start with the intrinsic value of a company. Now, how you arrive at that value is a different proposition, there you will have a lot of disagreement.
In their landmark book on Investing, Security Analysis, Ben Graham and Dodd describe intrinsic value in its opposition to market value. The notion of market value is clear: what the market is offering for the company today. However, intrinsic value takes a bit of work to tease out. I found the definition of intrinsic value at both investopedia and wikipedia unsatisfying. Graham describes it like this, “that value which is justified by the facts e.g., assets, earnings, dividends, definite prospects.” While the modern notion of this has been mostly relegated to Discount Cash Flow Models or “Owner Earnings,” if you follow Buffett, Graham had a more broadly based idea of Intrinsic value. You may value a company on Assets if it you are looking at traditional Net Net companies, or future earnings if you consider yourself a fundamental investor, or ability of a company to generate dividends if you are an income investor. Ultimately, you have a value of the company that is apart from price of the stock.
Ideally, you would only buy stocks whose market price is below its intrinsic value/ share. And commonly when the price of the stock reaches its fair value, or intrinsic value you might sell. Of course if the intrinsic value of a company keeps rising, you could also continue to hold it.
Tags: Investing terms
Comments
Leave a Reply