Show pageOld revisionsBacklinksBack to top This page is read only. You can view the source, but not change it. Ask your administrator if you think this is wrong. ====== Intrinsic Worth ====== Intrinsic Worth (also known as '[[Intrinsic Value]]') is the holy grail for the //value investor//. It represents the 'true,' underlying value of a business or [[asset]], based on its fundamental ability to generate cash and its inherent financial health. Think of it as what a company is //actually// worth, completely separate from the often-fickle price tag the [[stock market]] slaps on it each day. This value isn't a single, magical number pulled from a hat; it's a calculated estimate. The legendary investor [[Warren Buffett]] described it as "the discounted value of the cash that can be taken out of a business during its remaining life." The core idea is simple: if you can estimate a company's intrinsic worth and buy it for significantly less, you've found a bargain. This gap between worth and price is the foundation upon which fortunes in value investing are built. ===== The Heart of Value Investing ===== Understanding intrinsic worth is the difference between speculating and investing. Price is what you pay; value is what you get. The market can be moody, driven by fear, greed, and fleeting headlines. The father of value investing, [[Benjamin Graham]], personified this volatility as 'Mr. Market,' a manic-depressive business partner who one day offers to sell you his shares for a ridiculously high price and the next day offers to buy yours for a pittance. A savvy investor ignores Mr. Market's mood swings. Instead, they do their homework to determine a company's intrinsic worth. They then wait patiently for Mr. Market to have one of his pessimistic fits and offer to sell them a piece of that great business for far less than it's truly worth. That's the entire game in a nutshell: **buy a dollar of value, but pay only 50 cents for it.** ===== How Do You Calculate This Magic Number? ===== While there's no single perfect formula, investors generally use two primary approaches to get into the ballpark of a company's intrinsic worth. ==== The Futurist's Method - Discounted Cash Flow (DCF) ==== This is the most common and intellectually honest method. A [[Discounted Cash Flow (DCF)]] analysis estimates a company's worth by projecting all the cash it will generate for the rest of its life and then "discounting" that total back to its value in today's money. Why discount it? Because a euro today is worth more than a euro ten years from now, due to inflation and investment opportunity. The key ingredients are: * **Future Cash Flows:** Estimating the [[Free Cash Flow]] (the cash left over after running the business and making necessary investments) the company will produce each year. This requires a deep understanding of the business and its industry. * **Discount Rate:** A percentage used to adjust those future cash flows to their present value. It reflects the riskiness of the investment. A riskier company gets a higher [[discount rate]], which lowers its calculated intrinsic worth. ==== The Pawn Shop Method - Asset-Based Valuation ==== This approach is more conservative and asks a simple question: "If this company shut down and sold everything today, what would be left for the owners after paying off all the debts?" This involves adding up all the company's assets (cash, buildings, inventory) and subtracting all its liabilities (debt, accounts payable). The result is often referred to as the [[Net Asset Value (NAV)]] or [[Book Value]]. This method is particularly useful for companies with significant tangible assets, like industrial firms or banks, but it often undervalues businesses whose main assets are intangible, like brand names or software code. ===== It's an Art, Not a Science ===== ==== The Peril of Precision ==== Never forget that any calculation of intrinsic worth is an **estimate**. A DCF model can look impressively precise with its spreadsheets and decimal points, but its output is only as good as the assumptions you put into it. If your predictions about future growth or interest rates are wrong, your final number will be wrong too. It is better to be //approximately right// than //precisely wrong//. ==== Your Best Friend - The Margin of Safety ==== Because valuation is an imprecise art, wise investors demand a buffer for error. This is the famous [[Margin of Safety]]. If you calculate a stock's intrinsic worth to be €100 per share, you don't buy it at €95. You apply a margin of safety and might only buy it if the price drops to €60 or €70. This discount protects you if your initial estimate was too optimistic or if the company faces unexpected trouble. It is the single most important principle for preserving your capital and ensuring a profitable return.