Glossary
Intrinsic Value
An asset's true worth apart from its price
Intrinsic value is what a company is actually worth, calculated from the money it will earn — separate from whatever price the market has attached to it.
The usual method projects future cash, discounts it to present value, and sums it. Asset-based approaches and comparisons with similar companies are used alongside it.
Value investing starts here. A share price below intrinsic value means buying cheaply; above it means overpaying. The premise is that market prices move around while intrinsic value changes slowly.
The trouble is that no exact figure emerges. Change the assumed growth rate or discount rate slightly and the answer can double. So it should be read as a rough range, not a single number.
That is why the margin of safety exists: buy only well below intrinsic value, since the calculation may be wrong. In practice, the size of the cushion matters more than the precision of the maths.