Intrinsic Value

“I never want to pay above intrinsic value for stock – with very rare exceptions where someone like Warren Buffett is in charge. There are people – very few – worth paying up a bit to get in with for a longer term advantage.” Charlie Munger

“I am convinced that the core idea of value investing – the intrinsic value of a company is the sum of all cash flows between now and eternity discounted at an appropriate rate – will be as close to a law of nature as we will ever get in what is ultimately a non-scientific discipline.” Robert Vinall

“The key is paying a low price relative to something called intrinsic value. If you pay a high price relative to the value, you’re unlikely to do well and you probably have to get lucky to have a good return, but if you pay a low price relative to the intrinsic value, then the odds are on your side.” Howard Marks

“Regardless of the quality of the business, no business should be purchased above its intrinsic value. Buying a business above intrinsic value is not investing, it’s gambling.” Mohnish Pabrai

“For the most part, we select investments based on their valuations or discounts to their intrinsic worth. While we normally don’t care which businesses our investments are in as long as they are cheap relative to their worth, we do consider factors such as industry attractiveness and management quality.” Li Lu

“Of course, it's per-share intrinsic value, not book value, that counts. Book value is an accounting term that measures the capital, including retained earnings, that has been put into a business. Intrinsic value is a present-value estimate of the cash that can be taken out of a business during its remaining life. At most companies, the two values are unrelated.” Warren Buffett

"Intrinsic value is the number, that if you were all knowing about the future and you could predict all the cash a business would give you between now and judgement day, discounted at the proper discount rate, that number is what the intrinsic value of the business is. In other words, the only reason for making an investment and laying out money now is to get back more money later on. That's what investing is all about. When you look at a bond it's very easy to tell what you get back, it says it right on the bond, it says when you get the interest payments and the principal. The cashflows are printed on the bond, the cash flows aren't printed on the stock certificate. That's the job of the analyst, to change that stock certificate, to change that into a bond. To say that's what I think it will pay out in the future.” Warren Buffett

“Intrinsic value, is in its simplest form the discounted present value of future cash flows.” Frank Martin

“Book value is meaningless as an indicator of intrinsic value.” Warren Buffett

“Generally, we believe that identifying a significant difference between the market value of a security and the intrinsic value of that security is what defines an investment opportunity. We define intrinsic value as the amount that would accrue to the owners of a security if the underlying company were sold to a rational and well-informed buyer, or the company was liquidated with the proceeds distributed to security holders, or where the particular security sells at a price that would yield no better than a security considered ultra-safe, such as a US Treasury note or bond.” Lou Simpson

"It is important to understand that intrinsic value is not an exact figure, but a range that is based on your assumptions." Jean-Marie Eveillard

"There’s a lot more to intrinsic value than book value and P/E ratios. And anytime anybody gives you some simplified formula for figuring it out, forget it." Warren Buffett

"We focus on trying to establish an intrinsic value for a potential holding but recognise that a range of value may be more appropriate than a precise figure.” Jake Rosser

"I believe stocks should be evaluated based on their intrinsic worth, NOT on whether they are over- or under-priced in relationship with each other. For example, at the top of a bull market one can find stocks cheaper than others but they both may be selling above their intrinsic worth. If one were to recommend the purchase of company A because it was comparatively cheaper than company B, he may find that he will sustain a treacherous loss." Walter Schloss

“We define intrinsic value as the discounted value of the cash that can be taken out of a business during its remaining life. Anyone calculating intrinsic value necessarily comes up with a highly subjective figure that will change both as estimates of future cash flows are revised and as interest rates move. Despite its fuzziness, however, intrinsic value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.” Warren Buffett

"Market price is the price the stock is currently trading at. It is determined by supply and demand of sellers at a point in time and may have no relationship with private market or intrinsic value." Li Lu

“Calculations of intrinsic value, though all-important, are necessarily imprecise and often seriously wrong. The more uncertain the future of a business, the more possibility there is that the calculation will be wildly off-base.” Warren Buffett

“While Greenlight does not limit the industries in which it invests, it concentrates its efforts on situations where intrinsic value is most readily determinable by financial or accounting analysis.” David Einhorn

“If the estimation of intrinsic value is deemed substantially unreliable, there is simply no way to determine the extent to which the current market price affords a margin of safety.” Frank Martin

"The stock market is dominated by participants that perceive stocks almost as casino chips. With that knowledge, we can then buy great businesses sometimes well below their intrinsic value." Francois Rochon

“Buying a company below its historic average or intrinsic value (as that is how low quality businesses will often be valued when they are close to the nadir of their capital cycle) is a good starting point for any investment and has a track record of producing excess long-term returns.” Marathon Asset Management

"Wild swings in market prices far above and below business value do not change the final gains for owners in aggregate; in the end, investor gains must equal business gains." Warren Buffett

“The great thing about the stock market that stock prices fluctuate to a much greater extent than the underlying business values.” John Huber

"Growth in corporate intrinsic value is often obfuscated by stock price movement, which does not appropriately track the accretion in business value. That’s good for all of us who are appraisers of businesses, because it means you get more mispricing and better opportunity to get a franchise at a cheap price." Mason Hawkins

"We don’t let short term price movements alter our behaviour. Our investment decisions really have to do with value and measuring and trying to gauge the underlying intrinsic value of a company. What I’m saying is: When the stock price of a company is falling we don’t just abandon ship and sell." David Herro

"Market prices, let me stress, have their limitations in the short term. Monthly or yearly movements of stocks are often erratic and not indicative of changes in intrinsic value. Over time, however, stock prices and intrinsic value almost invariably converge.” Warren Buffett

“I am what is called a value investor, and that means you look at the situation, you don’t look at the atmospherics, you don’t look at the aesthetics, you look at the hard value – the company’s assets and the cash flow that its business produces – and you value those things, and you come to something called the intrinsic value, and then you see if you can buy it for less. If you pay full intrinsic value, you’ll probably get a fair return; if you pay more, you’ll probably have an unsuccessful experience, but if you can buy it for less than the intrinsic value, you should have an above-average return. That’s value investing, and I think it is the intellectually soundest form of investing.” Howard Marks

"The price of any particular security can be pictured as something resembling a captive balloon attached, not to the ground but to a wide line traveling through space. That line represents ‘intrinsic’ value. As time goes on, if a company's earning power and true prospects improve, the line climbs higher and higher. If these or other basic ingredients of intrinsic value get worse, the line declines correspondingly. At any one time, the psychological influences (i.e., how the financial community is appraising these more fundamental matters of intrinsic value) will cause the price of the particular stock to be anywhere from well above this line to well below it. However, while momentary mass enthusiasm or unwarranted pessimism will cause the stock price to be far above or well below intrinsic value, it, like our captive balloon, can never get completely away from the line of true value and will always be pulled back toward that line sooner or later." Phil Fisher

“In the same way that the law of gravity governs all particle matter in our universe, the law of intrinsic value always ends up winning out in the stock market: it eventually brings stocks that trade above their underlying values back to Earth. The difference between this law of intrinsic value and gravity is that it doesn’t happen instantaneously. To use scientific jargon: the time variable is not part of the equation.” Francois Rochon

“If we define investment outcomes in terms of the deviation of share prices from ‘fair value’, there is no evidence that prices (whether daily, weekly, or monthly) are normally distributed around intrinsic value. Our entire investment experience tends to support an alternate hypothesis, namely that the range of investment outcomes is not normally distributed, but is characterised by ‘fat tails.’ We believe that shares spend relatively little time at ‘fair value’. Rather, lengthy periods of overvaluation are followed by lengthy periods of undervaluation.” Marathon Asset Management

"The concept of a margin of safety is that an investor should purchase a security at a price sufficiently below his estimate of its intrinsic value that he will have protection against permanent loss even if his estimate proves somewhat optimistic.” Ed Wachenheim

“While market values track business values quite well over long periods, in any given year the relationship can gyrate capriciously.” Warren Buffett

“A stock return will eventually echo the increase in per share intrinsic value of the underlying company (usually linked to the return on equity).” Francois Rochon

“Over time, of course, market price and intrinsic value will arrive at about the same destination. But in the short run the two often diverge in a major way.” Warren Buffett

“In the short term, a company’s stock price may be volatile and appear to reflect the highs and lows of market emotion; over longer time periods, it will tend toward an average appraisal or intrinsic value. This outing of value happens in many ways. It may occur through information dissemination and the aggregate actions of market participants. It may be the result of a tender offer for the company. The company itself may help to out intrinsic value through the repurchase of stock or payment of special dividends. In any case, the manager’s chain of logic should begin with the assumption that stock prices follow internal business compounding.” Brian Bares

"Intrinsic value is important because it lets the investor take advantage of temporary mispricings of stocks. If a stock is selling for less than its intrinsic value, chances are this will ultimately be recognised and the market price will rise to a level more indicative of the company's worth. Or the company may choose to sell out at its intrinsic value, or a corporate raider may come along and try to take it over at a price that reflects something closer to intrinsic value. If a stock is priced way over intrinsic value, it may become vulnerable to the 'king is wearing no clothes syndrome.’" Christopher Browne

“A company’s intrinsic value is primarily derived from the earning power of its operations. It is also contributed to by non-operating assets, net of liabilities. Corporate governance plays an important role as well, because it determines how much of a firm’s value can be claimed by minority shareholders. The same goes for the general political and legal environment in which the firm operates. Enhancement of a firm’s intrinsic value can come from improvements in its earning power, resulting from its strengthening competitive position, new business innovation, better use of its operating and non-operating assets, improvements in its corporate governance as it relates to minority shareholders and the macro environment.” Li Lu

“When we talk about business quality, we’re looking through our fundamental research to assess the company’s ability to protect and grow intrinsic value. If the dollar of assets you buy is increasing in value at an above-average rate, that’s an opportunity to generate alpha.” Ricky Sandler

“The real test is the gain in intrinsic value, for sure, over time.” Warren Buffett

"For our portfolio, I select only those securities whose businesses are entrenched and predictable and whose intrinsic values are most likely to appreciate over time. This way, time is on our side - no matter how long the waiting period, we're likely to come out very well in the end." Li Lu

“We operate basically in the same way that we always have, looking for the intrinsic value and the quality of the businesses rather than trying to deal with the vagaries of the marketplace, as complex as they are.” David Polen

“Greenlight believes that an investment approach that emphasises intrinsic value will achieve consistent absolute investment returns and safeguard capital regardless of market conditions.” David Einhorn

“At Oakmark, we're buying the companies that we think are cheapest relative to their intrinsic business value.” Bill Nygren

“A couple of bad years of earnings shouldn’t determine the intrinsic value of those companies.” Matthew McLennan

“Cyclical factors have also hurt our current look-through earnings, but these factors do not reduce intrinsic value.” Warren Buffett

"In the long run, securities tend to sell close to a price level not disproportionate to their indicated value. This statement is indefinite as to time; in some cases the day of vindication has actually been deferred for many years." Benjamin Graham

“Understanding intrinsic value is as important for managers as it is for investors. When managers are making capital allocation decisions - including decisions to repurchase shares - it's vital that they act in ways that increase per-share intrinsic value and avoid moves that decrease it. This principle may seem obvious but we constantly see it violated. And, when misallocations occur, shareholders are hurt.” Warren Buffett

“While we cannot predict short-term market movements, we are confident that over the long haul, the market valuation of a company is grounded in its intrinsic value driven foremost by its earning power.” Li Lu

Further Reading:
‘Value - Market, Intrinsic and Private’ - Investment Masters Class
‘The Buffett Series - Buffett on Book Value’ - Investment Masters Class
‘Intrinsic value: “fuzzy,” but essential’, Warren Buffett - BRK 2003 Afternoon Session - Part 5. CNBC.