How to calculate intrinsic value? Is there a formula to it? How can we know whether the current price is a value buy?
There are methods to it. For instance, one could look at the balance sheet and start with the balance sheet numbers. As you know, balance sheet is typically written in historical-cost basis. Suppose, you were to value those assets at current prices then you will know that there is a big difference between the balance sheet with current prices versus balance sheet with historical prices. And, if the market is quoting more based on the historical book value, then clearly you know that there is a value available over there. Similarly, you can base it on earnings and you can also base it on discounted cash flow. Discounted cash flow has lot of assumptions and some pitfalls. So, there are these different theories available by which you can come to a conclusion that this appears to be a fair value. And then as a value investor, you don't want to buy it at fair value, you want to buy it at a discount to the fair value. That's why you apply that 20, 30 or 40 per cent discount and then buy.
This article was originally published on August 14, 2018.
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