Intrinsic Value: Yours, and an Estimate
Intrinsic value is an estimate of what a business is actually worth, as distinct from the price its shares currently trade at. It is your estimate rather than a discoverable figure, which is why the margin of safety exists - it is the allowance for the estimate being wrong.
How it works
Intrinsic value is what a business is worth on its own merits. What it will produce for an owner over its life, independent of what anybody is currently willing to pay for a share of it.
Price is observable and value is not. The price is on a screen; the value is a conclusion you reached, and the asymmetry between those two things is the whole subject.
The gap is the case. Buying below your estimate is the entire proposition of value investing, and everything else is machinery for producing the estimate.
Whose estimate, by which method
Two competent analysts reach different figures. Not because one is careless — because the inputs are forecasts, and reasonable people forecast differently.
Three methods, three answers. Discounted cash flow gives 2,020 in the illustration, a multiple of earnings gives 1,750, and asset value gives 1,100. The disagreement is information, not error.
Book value is not intrinsic value. It records what assets cost, not what they produce, and for most modern businesses the productive assets — brand, software, people — are not on the balance sheet at all.
The hard question is durability. Any method can extend this year’s cash flow forward; whether the business can still earn it in ten years is a judgement about competition that no formula contains. That judgement is where almost all the estimating error lives.
In practice: the margin of safety
The margin of safety is not caution, it is arithmetic. If the estimate could plausibly be thirty per cent too high, buying thirty per cent below it means an ordinary error is survivable.
Cheapness is frequently accurate. A share trading well below an estimate is often trading there because the market has priced something the estimate missed, and “everybody else is wrong” is an unusual position to be right about.
There is no timing component. A correct estimate can sit uncorrected for years, and the cost of waiting is real even when the analysis is sound.
An estimate should move when the facts move. Revising downward after bad results is the process working; defending the original figure because you own the shares is the process failing.
Write the estimate before checking the price. Anchoring is not a weakness that discipline overcomes — it is automatic, and the only reliable defence is doing the work in an order that makes it impossible.
One test separates an estimate from a rationalisation, and it takes a sentence. Write down what would have to be true for the business to be worth less than the price — not what could go wrong in general, but the specific assumption that, if wrong, collapses the case.
If you cannot name it, the estimate has not been thought through. Almost every valuation rests on one or two load-bearing assumptions — a margin holding, a competitor not arriving, a product still being bought in five years — and the rest of the model is arithmetic around them. Naming the load-bearing assumption also tells you what to monitor, which converts an estimate from a one-off exercise into something you can actually track.
What intrinsic value is not
It is not discoverable. There is no correct figure to find.
It is not book value. That is what assets cost, not what they earn.
It is not a price target. Nothing says when or whether price meets it.
And it is not the same for two people. The inputs are judgements.
When it fails
The estimate fails most often on businesses that change. A stable, boring company can be valued reasonably; one whose industry is being reshaped cannot, and the method gives no warning that it has stopped working.
The second failure is anchoring to your own earlier estimate. The number you wrote last year is not evidence, and treating it as a benchmark makes every revision feel like a concession.
A third is confusing a low price with a large gap. A share that has halved is cheaper than it was and not necessarily cheap.
A fourth is a margin of safety applied to a precise-looking number. Thirty per cent below a figure that could be wrong by a factor of two is not a margin.
And a fifth is holding an estimate you cannot state in a sentence. If the reason the business is worth more than its price takes three pages, it is usually a hope with supporting material.
The original data
Of the 31,760 trading and investing videos in this site’s corpus, 1 has “intrinsic value” in the title, at
1,019,621 views. “Valuation” returns 9 at a median of 17,868 across 7 channels, “discounted cash flow”
returns 1 at 143,078 views, and “financial statements” returns 3 at a median of 1,065,893. The counts are
in research/corpus-coverage.json, produced by site/measure_corpus.py.
The figures in the diagrams on this page are illustrative. The 2,020 estimate against a 1,600 price gives a margin of 420, or 21% — below the thirty per cent most value investors would require, which is exactly the kind of judgement the arithmetic makes visible rather than settles.
A single video at a million views is what an unmet demand looks like. The concept underlying every value-investing decision is essentially absent from the platform where most people learn about markets, while indicator tutorials number in the hundreds. Write your estimate down, with the three assumptions it rests on, before you look at the price — the discipline costs nothing and it is the only part of this that cannot be outsourced.
Related
Discounted cash flow is the main method and its sensitivity. Valuation covers the alternatives and when each applies. And value investing is the approach built on the gap.
The discipline that made this useful for me was writing the estimate down before looking at the price. Once I have seen the price, my estimate lands suspiciously close to it, and I have never found a way around that other than doing the work in the right order.
— Michael Whitman
This page is educational, not financial advice. Test every idea on your own charts before risking money.