Definition
Intrinsic Value
Intrinsic value is the estimated true worth of a business based on its fundamentals and future cash flows, independent of the current market price.
Intrinsic value is what a rational, informed buyer would pay for the whole business, derived from earnings power, growth, and cash flows (often via DCF). Value investors buy when the market price is well below intrinsic value, expecting the gap to close over time.
The concept, central to Benjamin Graham and Warren Buffett, distinguishes price (what you pay) from value (what you get). Because estimates are imprecise, investors demand a margin of safety, buying only when the discount is large enough to absorb errors.
Related terms
- Discounted Cash Flow (DCF)DCF is a valuation method that estimates a company's worth by projecting its future cash flows and discounting them back to today's value.
- Margin of SafetyMargin of safety is the practice of buying a stock at a meaningful discount to its estimated intrinsic value to protect against errors and bad luck.
- Value InvestingValue investing is a style of buying stocks that trade below their intrinsic worth, betting the market will eventually recognise their true value.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.