What is Intrinsic Value?

The concept of intrinsic value is central to value investing, as pioneered by Benjamin Graham and practiced by Warren Buffett. The idea is that every business has a true worth determined by its assets, earnings power, growth prospects, and competitive position. The stock market, driven by emotions and short-term thinking, may price a stock above or below this intrinsic value.

There is no single formula for intrinsic value — it is an estimate derived from various valuation methods. Common approaches include DCF analysis, asset-based valuation (net asset value), earnings power value, and dividend discount models. Each method may produce a different result, so analysts often triangulate across methods.

The difference between intrinsic value and market price is called the margin of safety. Graham recommended buying only when the market price was at least 30-50% below estimated intrinsic value to account for errors in the estimate. Buffett has said he would rather be approximately right than precisely wrong, acknowledging that intrinsic value is always an estimate.

Intrinsic value changes over time as a company's fundamentals evolve. A company that improves its competitive position, grows earnings, or reduces risk will see its intrinsic value rise. Conversely, deteriorating fundamentals reduce intrinsic value regardless of what the stock price does.