What is intrinsic value?

A stock price is what the market is willing to pay for a share today. Intrinsic value is what the business is actually worth — the present value of all the cash it will generate for its owners over its lifetime. These two numbers are often different.

Price versus value

Benjamin Graham described the market as a "voting machine" in the short run and a "weighing machine" in the long run. In the short term, prices reflect sentiment, momentum, fear, and greed. Over decades, they tend to converge toward the underlying value of the business.

This gap between price and value is where investing opportunity lives. When a good business is temporarily mispriced — because of market panic, a bad quarter, or simple neglect — a patient investor can buy it for less than it's worth and wait for the price to catch up.

How we estimate it

We estimate intrinsic value by projecting future earnings and discounting them back to the present. This is necessarily approximate — the future is uncertain. The honest answer is that intrinsic value is a range, not a single precise number.

This is why we apply a margin of safety: rather than trying to pinpoint exactly what a business is worth, we identify a price far enough below a reasonable estimate that small errors in our assumptions don't matter much.

Intrinsic value and the Payback Price

Our Sticker Price is our best estimate of intrinsic value. The Payback Price — 50% of the Sticker Price — is the price at which we think the margin of safety is sufficient for most investors. If you have high conviction and the business is exceptionally predictable, you might be comfortable buying closer to the Sticker Price. If you're less certain, the Payback Price is the more conservative target.