Do You Consider Intrinsic Value When Investing?

It's not just about price action when you look for a solid value. You need to consider intrinsic value, too.

One of the traps that many beginning investors fall into is the idea that the price of a stock — and how the current price compares to the past price — is the most important factor.

While it can be exciting to look at prices, and you can get some insight from looking at price action, if you really want to find a solid investment that can provide you with reasonable returns for the future, you need to consider intrinsic value.

Money Graph

What is Intrinsic Value?

Rather than just looking at a price, and price history, an investor considering intrinsic value has to look deeper. Investopedia points out that intrinsic value requires that you look at all aspects of a business — including the intangible factors.

Another way of terming intrinsic value is that you are looking at the?fundamentals?of a company as you decide to invest. A little fundamental analysis can help you identify the intrinsic value of a company, which is also sometimes referred to as the “true” value of a company.

Looking at the intrinsic value of the company allows you to see that what that company offers beyond mere price: Profit margins, management, growth potential. These items, and other factors that influence intrinsic value, can be hard to calculate. The reason it's so tempting to focus on price action is that it's fairly tangible. The price moved this way. It went up or down. And there might be a short-term (or long-term) trend of the price moving a certain way.

When you start digging deeper, and looking at intrinsic value, you start looking at intangible items. They are harder to quantify. Now your moving into the realm of the qualitative. This can be a little more difficult to pin down.

The good news is that you don't have to pin it down. You can get a general idea of a company's intrinsic value by digging into the items that make the company “tick.” You can then decide whether the stock is overvalued (meaning that its intrinsic value is lower than its market value), or whether it's a good buy (because the intrinsic value is higher than the market value).

Using intrinsic value to choose stocks that the market doesn't value highly enough can help you add long-term investments to your portfolio — and provide you with the potential for gains over time.

2 thoughts on “Do You Consider Intrinsic Value When Investing?”

  1. Mike@WeOnlyDoThisOnce

    While it’s tricky to get the lowdown on this, as you point out, it is often worth it for substantial investments I’ve found. It just seems to be more an issue of time management (i.e. if you’re willing to put in the background research).

  2. Anton Ivanov | Dreams Cash True

    As a matter of fact, my entire investing strategy for stocks and even narrow-focus ETFs revolves around their intrinsic values. I buy securities when their intrinsic values are substantially higher than their current trading prices. This allows me to buy great companies at discount prices (something that pretty much every great investor in history has done).

    Intrinsic value can be tricky and time consuming to calculate, but there are many online resources which come up with their own estimates. One that I commonly use is Morningstar, which uses a rather complex method of discounted cash flows. But the calculations are done using publicly available financial data and can be performed by anyone willing to do the work.

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