Intrinsic Value

Intrinsic value is the perceived or calculated true value of an asset, company, or investment based on fundamental analysis, independent of its current market price. It represents what something is actually worth based on its cash flows, assets, growth prospects, and other tangible factors rather than what the market currently prices it at. The concept is central to value investing, popularized by Benjamin Graham and Warren Buffett. The basic idea is simple: if you can determine what something is truly worth (intrinsic value) and buy it for less (market price), you have a "margin of safety" protecting against errors and adverse developments. Calculating intrinsic value involves analyzing financial statements, projecting future cash flows, assessing competitive position, and applying a discount rate to convert future money into present value. The most common approach is discounted cash flow (DCF) analysis, which estimates all future cash flows and discounts them to today's value. Different analysts may arrive at different intrinsic value estimates for the same company because the calculation involves assumptions about future growth, profitability, and risk. This subjectivity means intrinsic value is always an approximation, not a precise figure. The relationship between intrinsic value and market price creates opportunities. When market price is significantly below intrinsic value, the stock may be undervalued and worth buying. When price exceeds intrinsic value, the stock may be overvalued. Over time, market prices tend to converge toward intrinsic values, though this can take years. Understanding intrinsic value helps investors avoid chasing momentum or selling during panics. If you've done the analysis and believe a stock is worth $100, a price drop to $70 on temporary bad news might represent a buying opportunity rather than a reason to sell.