Value = Σ FCFₜ ÷ (1 + WACC)ᵗ + Terminal ValueThe point of comparing price with value is to spot obvious gaps — not to manufacture false precision.
Intrinsic Value
The estimated true worth of a business, based on the cash it will generate over its lifetime — independent of what the market currently charges for it.
What is intrinsic value?
Intrinsic value is the present value of all the cash a business will generate for its owners over its lifetime, discounted back to today. It is an estimate conditioned on assumptions, not a fact — the foundation of value investing, where price is what you pay and intrinsic value is what you get.
- It is forward-looking and based on future cash, not accounting book value.
- It is always a range, never a single precise number.
- A market price well below your estimate is where opportunity may exist.
Definition
Intrinsic value is the present value of all cash a business will produce for its owners from now until forever, discounted back to today. It is an estimate, not a fact: two careful analysts will compute different numbers because they hold different assumptions about the future.
The concept is the foundation of value investing. Price is what you pay; intrinsic value is what you get. When the market price falls well below your estimate of intrinsic value, an opportunity may exist.
Why it matters
Without an independent estimate of worth, every price looks reasonable. Intrinsic value gives you a reference point that does not move when the market panics or celebrates — which is exactly when reference points are most valuable.
Simple example
Imagine a kiosk that reliably earns $10,000 in free cash per year. If you require a 10% return, a rough intrinsic value is $100,000 ($10,000 ÷ 0.10). If someone offers to sell it for $60,000, the gap between price and value is your potential margin. The arithmetic is simple; the hard part is being right about the $10,000 lasting.
Common misconception
"Intrinsic value is a precise number." It never is. It is a range conditioned on assumptions. Treating a single output as truth — instead of testing how it moves when assumptions change — is the most common way the concept gets misused.
- 1It is forward-looking and based on future cash, not accounting book value.
- 2It is always a range, never a single precise number.
- 3A market price well below your estimate is where opportunity may exist.
| Shortcut | The estimated true worth of a business, based on the cash it will generate over its lifetime — independent of what the market currently charges for it. |
|---|---|
| Disciplined workflow | It is forward-looking and based on future cash, not accounting book value. → It is always a range, never a single precise number. → A market price well below your estimate is where opportunity may exist. |
Sharpen your investing with free email lessons
Practical guides on valuation, margin of safety, and reading businesses — straight to your inbox. No spam.
We respect your privacy. Unsubscribe anytime.
True story · Washington Post, 1973
You don't need a scale to know a man is fat
In the brutal 1973–74 bear market, the entire Washington Post Company — the newspaper, Newsweek magazine and several TV stations — traded for around $100 million. Buffett conservatively reckoned the assets were worth at least $400 million. No precise model was needed: the gap between price and value was visible from across the street.
He invested about $10.6 million, then watched the stock fall further and did nothing but wait. Decades later the position was worth more than $1 billion, plus a stream of dividends along the way — a return of roughly one hundred times. As Buffett put it: you don't need to know a man's exact weight to know that he's fat.
The point of comparing price with value is to spot obvious gaps — not to manufacture false precision.
≈$10.6Minvested in 1973
4×assets vs market price
≈100×over three decades
True story · PetroChina, 2003
A valuation done with an annual report and a weekend
Buffett read PetroChina's annual report at home and pegged the company's value at roughly $100 billion. The market was pricing it near $37 billion. He built no spreadsheet, met no management, sought no second opinion — the gap was too wide to need precision. Berkshire bought about $488 million of the Hong Kong-listed shares.
By 2007, rising oil prices and a re-rating had carried PetroChina's market value past $250 billion. Buffett sold the entire stake for about $4 billion — roughly an eight-fold return plus dividends — and moved on.
When value is triple the price, ordinary accuracy is enough. The best decisions rarely require the most elaborate models.
$37B vs $100Bprice vs estimated value
≈$488Minvested in 2003
≈8×realized by 2007
True story · Benjamin Graham
The exception that beat all the rules
In 1948, Graham-Newman put about $712,000 — close to a quarter of the fund — into GEICO, an insurer that sold directly to careful drivers by mail and skipped the agent entirely. The position broke Graham's own diversification rules, and regulators even forced the fund to distribute the shares to its investors.
Those who kept the shares watched them grow more than two hundred-fold. Graham, the great apostle of wide diversification and statistical bargains, admitted in his memoirs that this single decision earned more than all the profits from twenty years of his diversified operations combined.
Even the father of quantitative bargains conceded: one outstanding business, deeply understood, can outweigh a career of small edges.
$712Kinvested in 1948
200×+growth of the stake
≈25%of the fund in one stock
Related tools
Frequently asked questions
Is intrinsic value the same as book value?
No. Book value is an accounting measure of assets minus liabilities. Intrinsic value is forward-looking — based on future cash generation, which may be far above or below book value.
Who coined the concept?
Benjamin Graham formalized it in "Security Analysis" (1934), and Warren Buffett made it the centerpiece of his investment philosophy.
Practice estimating intrinsic value with guided workflows:
Download Valuefocus