"Price is what you pay. Value is what you get."
Intrinsic value is the true, fundamental worth of a business, completely ignoring the stock market's daily mood swings.
How to think about it
Intrinsic value works best when you stop obsessing over ticker symbols and start thinking like a private business owner.
Imagine you are buying a farm. You don't care what a frantic auctioneer yells that the farm is worth today. You care about one thing: How much cash can I make selling crops over the next 10 years?
If the farm will reliably produce $130,000 in lifetime profit, and you want a reasonable return on your investment, you might calculate that paying $100,000 today is a fair deal. That $100,000 is the Intrinsic Value.
The Math
Toggle between Benjamin Graham's quick heuristic formula and a full Discounted Cash Flow (DCF) model.
Core Philosophy
Market prices fluctuate wildly based on rumors, algorithmic trading, and panic. Intrinsic value anchors you to reality.
By calculating value yourself, you stop caring if the stock is up or down 5% today. You only care if the stock price is above or below the true value.
Earnings can be legally manipulated using accounting tricks. Free Cash Flow (FCF) is the unarguable truth of a company's financial health.
Never buy a stock right at its intrinsic value. Demand a discount (e.g., 20-30%) to protect yourself from errors in your own calculations.
Warren Buffett calls the Margin of Safety the three most important words in investing. Because forecasting the future is impossible, your valuation will always be slightly wrong. You protect your portfolio by demanding a massive discount.
The Takeaway: If you calculate a stock is worth $100, do not buy it for $95. Wait for the market to panic and offer it to you for $65. That $35 gap is your Margin of Safety. It ensures that even if your growth estimates were too optimistic, you still won't lose money.
A DCF model is extremely sensitive to your assumptions. If you project that a company will grow at 20% a year for a decade, your calculator will output a massive intrinsic value. Be conservative.
In most DCF models, the 'Terminal Value' (years 10 to infinity) makes up 60-80% of the total calculated intrinsic value. A slight tweak to your perpetual growth rate (e.g., from 2% to 3%) can violently alter the final stock price.
Never blindly drag a company's past 5-year growth rate into the future. As companies get larger, the law of large numbers forces their growth rates to slow down. Assume a decaying growth rate.
Your discount rate (Required Return) should reflect the risk of the business. Use an 8-9% discount rate for a stable mega-cap like Apple or Johnson & Johnson, but demand a 12-15% return for a risky, volatile small-cap.
