Hi Faizui -
How are you defining "Intrinsic Value"?
Different definitions from a Google search:
1) "The actual value of a security, as opposed to its market price or book value. The intrinsic value includes other variables such as brand name, trademarks, and copyrights that are often dificult to calculate and sometimes not accurately reflected in the market price. One way to look at it is that the market capitalization is the price (i.e. what investors are willing to pay for the company) and intrinsic value is the value (i.e. what the company is really worth). Different investors use different techniques to calculate intrinsic value."
OR
2) "An alternative, though related approach, is to view intrinsic value as the value of a business' ongoing operations, as opposed to its accounting based book value, or break-up value. Warren Buffett is known for his ability to calculate the intrinsic value of a business, and then buy that business when its price is at a discount to its intrinsic value."
Below is a fun Web Site called Buffet's Valuation Formula. Buffet always trys to keep things very simple.
moneychimp.com
Buffett's Value Formula (?)
Warren Buffett hasn't exactly published his formula for what he calls the intrinsic value of a company, but he has dropped a number of hints. He apparently multiplies estimated future earnings by a confidence margin between zero and a hundred percent (a bird in the bush being worth 0.5 birds in the hand, and all that; bush birds are the earnings you hope for, and hand birds are the earnings you're confident will materialize). He then compares these probable earnings with something he has total confidence in, by using a U.S. treasury yield as his discount rate. In calculator form it looks like this:
It will be interesting to see what general definitions are used among our Value Investing group to arrive at a "fair" value price.
I tend to use a variation of the PE ratio based on my best guess for forward earnings and compare the result to the Industry sector/sub-sector PE. I generally will consider an investment fairly (or Over) valued when the Industry PE = or (<) to my estimated PE.
EKS |
