Intrinsic Value of Stock
Successful long term investors consider the intrinsic value of stock before buying and when deciding to sell. This approach to stock investing goes back to the black days following the 1929 stock market crash which ushered in the Great Depression. Benjamin Graham taught investors that they did not need to play the market as though they were picking numbers on the roulette wheel. Rather he taught investors to do fundamental analysis of stocks in search of forward looking earnings. At the same time investors learned to consider what features of a stock provided a safety net in times of trouble. This was the margin of safety that some stocks have in the form of money in the bank, unencumbered property, or products that are unassailable in their market niche. Successful stock investing became a matter of thoughtful analysis and not a matter of guess work.
What Is the Intrinsic Value of Stock?
Think of intrinsic stock value as the fundamental value of the stock. Analyze the stock to determine its price based on predicted future income and then subtract the current stock price. Calculate expected company cash flow and then discount to current dollars. Determining intrinsic value of stock is a discounted cash flow valuation. The key to determining intrinsic value of stock is getting a clear idea of the medium and long term prospects of the business in question. Successful stock investors learn to judge how well a company will manage its assets, products, costs, R&D, and marketing. When the picture is clear an investor can make an informed decision. If the market price is less than the intrinsic value of stock it is time to buy and if one owns the stock and the prices are reversed it is time to sell.