Intrinsic Value

Intrinsic value is the perceived or calculated "true" value of an asset, company, or investment based on fundamental analysis. It represents what something is actually worth, regardless of its current market price.

Methods to Calculate Intrinsic Value:

1. Discounted Cash Flow (DCF):

   • Projects future cash flows
   • Discounts them to present value
   • Most theoretically sound method

2. Dividend Discount Model (DDM):

   • For dividend-paying stocks
   • Values based on future dividend stream

3. Asset-Based Valuation:

   • Sum of company's assets minus liabilities
   • Useful for asset-heavy companies

4. Earnings-Based (Graham Formula):

   • V = EPS × (8.5 + 2g)
   • Where g = expected growth rate

Margin of Safety: Warren Buffett's approach: Only buy when market price is significantly below intrinsic value (typically 25-50% discount).

Limitations:

• Heavily dependent on assumptions
• Different methods give different values
• Future predictions are inherently uncertain