Intrinsic Value

# Intrinsic Value **Intrinsic value** is the cornerstone of value investing. It represents the true worth of a business, independent of its current market price. ## Definition Buffett defines intrinsic value as: > "The discounted value of the cash that can be taken out of a business during its remaining life." This definition emphasizes two key elements: 1. **Cash flows**, not accounting earnings 2. **Discounting** to account for the time value of money ## Calculation The calculation of intrinsic value involves: 1. **Estimating future cash flows** — This requires understanding the business, its competitive position, and its growth prospects. 2. **Selecting a discount rate** — Typically, Buffett uses the risk-free rate (long-term government bond yield) as a baseline. 3. **Calculating present value** — Discounting all future cash flows back to today. ## Art, Not Science Buffett emphasizes that intrinsic value is an estimate, not a precise figure: > "Intrinsic value is an estimate rather than a precise figure... two people looking at the same set of facts will almost inevitably come up with at least slightly different intrinsic value figures." ## Price vs. Value The market price of a stock often diverges from its intrinsic value—sometimes dramatically. The value investor seeks to buy when price is significantly below intrinsic value, creating a **margin of safety**. ## Conclusion Understanding and estimating intrinsic value is the most important skill in value investing. While imprecise, it provides an essential anchor for investment decisions.