Intrinsic value is what an investor believes a company's true value is.
Over the years, there have been many definitions of intrinsic value. John Burr Williams, author of The Theory of Investment Value, defined it as the present value of future cash flows. Benjamin Graham defined it as "that value which is justified by the facts". Warren Buffett has tended to use Williams's definition. John Maynard Keynes looked at intrinsic value as the prospective yield or return on investment.
A perhaps less scholarly answer is simply to say that intrinsic value is the fair, or true, value of a stock. The most common ways to estimate intrinsic values are by using discounted cash flow analysis or relying on a multiple such as the P/E ratio, though asset-based valuations are commonly used for commodity producing firms or holding companies. Value investors believe that market prices trend along with a stock's intrinsic value over time.
Value investors strive to purchase assets trading for less than their intrinsic value, which affords them a margin of safety. The bigger the discount to intrinsic value (or, put another way, the larger the margin of safety), the more attractive the purchase price.
Related Fool Articles
- Intrinsic Value Explained
- Intrinsic Value vs. Market Value
- Security Analysis 201: Intrinsic Value
- Security Analysis 401: Calculating Intrinsic Value
Recent Mentions on Fool.com
- Berkshire Hathaway Still Looks Undervalued
- Warren Buffett's Top 3 Lessons of the 21st Century
- General Electric's Move Shows the Power of Investor Sentiment
- 3 Stocks Near 52-Week Highs We?d Still Buy
- 3 Things Every High-Growth Investor Needs to Know
- 3 Simple Stock-Buying Strategies that Could Make You Rich