Last time we concluded by defining the IV of a stock. An Intrinsic Value is not always the same as the sticker price (but sometimes it could be). Rather, It’s the inherent value that this business deserves in today’s market.
Simply put, it’s very similar to the net-worth of an individual. You add up the sources of income and subtract the expenses. What you’re left with is that person’s net-worth. Same thing with businesses. What is the expected income from operation? What would be the value of all assets if they got liquidated? Patents, royalties, etc. Anything that the company owns and can convert into cash, minus whatever loans or liabilities it has in the market.
Next, divide that by the number of shares the business has (or intends to make) available in the market. For example, say the calculation we just made above resulted in ten million dollars. That is the net-worth of the business. The number of shares is one million. This gives rise to an IV of $10. This is what a single share of that business is intrinsically worth!
Armed with this knowledge, your decision-making process becomes a whole lot easier. You now have a baseline to come back to. Now, and only now, you go ahead and check the current sticker price of the business; what Mr. Market “feels” the price of one share of that business should be today! If Mr. Market was in a good mood and wanted to raise the price above $10 per share, then as an “Intelligent Investor”[1], you would hold back and keep the stock symbol on your wishlist. If the sticker price was less than ten, then the next step of investigation would kick in: Is it a business you would own for a 100 years, proudly? In other words, Is it a “wonderful”, growth, and money-making business?
That will be the subject of the next episode of this series. Stay tuned and be well…
To be continued…
The Wealth Maker
[1] Ben Graham has a book holding the same title. I’m not sure if he was the first to use this term though. The book is one of the best references on value-based investing.
The Wealth Maker 