So, you found a stock. It’s one that you’re interested to invest into. You may have the following questions:
– When is the right time to buy?
– When is the right time to sell?
For value investors, many would attempt to calculate the intrinsic value of a stock. It is a method to estimate how much a stock is truly worth presently. Then, value investors would compare the stock’s intrinsic value with its current share price. Thus,
– If a stock’s intrinsic value is above its share price, it’s undervalued.
– If a stock’s intrinsic value is below its share price, it’s overvalued.
Value investors would buy if a stock is undervalued and would sell if a stock is overvalued. The concept is pretty simple. In this article, I’ll share five things you need to know before attempting to calculate the intrinsic value of a stock. They are:
#1: It’s for Long-Term Investors
The calculation of intrinsic value is catered to long-term investors. They intend to buy good quality stocks and hold them as long as they are highly profitable. Some may hold onto them for eternity as these stocks deliver ever-rising profits year after year. The ultimate goal is to achieve long-term capital appreciation from ownership of these stocks as their market value increase in tandem with consistent growth in earnings over the long-term.
#2: It’s for the Conservative.
Stock investors are conservative and risk averse by nature. The formula to calculate intrinsic value is meant for stocks that grow profits consistently. It’s meant to dismiss stocks that produce mediocre financial results. As such, the formula helps investors to avoid making investments in bad stocks as it focuses only for good stocks with potential for growth.
#3: It Focuses on the Business.
Great emphasis is placed on a stock’s fundamental qualities. The mentality is about ownership and not short-term quick profits. It encourages investors to look away from the buzz, the noise and the movements of the stock market.
Today, most ‘investors’ believed that stock investing is about speculating stock prices. Regrettably, they were misled. Instead of focusing on the business, they would focus on stock prices. As such, most fail to achieve consistently returns from investing in the stock market as they are mostly lousy speculators believing that they are good. Here’s a good news if you are new to stock investing. Real profits made from stock investing has absolutely nothing to do with stock price prediction or speculation.
#4: Intrinsic Value is an Estimate Figure
Two different individuals would eventually come out with different intrinsic value figures for the same stock. This is despite looking at the same set of financial reports. This is because the calculation of intrinsic value involves multiple assumptions. To name a few, they include:
– Should I use earnings / cash flow to calculate intrinsic value?
– What’s my discount rate?
– What’s the growth rate of a stock’s earnings / cash flow?
– How far should I project a stock’s future earnings / cash flow?
As such, there is no right or wrong answer to what the intrinsic value of a stock is. It’s an estimate meant to guide investors to make better investment decisions.
#5: It’s not the Ultimate Tool
Intrinsic value calculation is a useful tool for stock investors. But, it is not the ultimate tool as it is not perfect. Most stock investors would use a combination of investing tools to assess a stock’s investment potential. This includes P/E Ratio, P/B Ratio, and calculating Dividend Yields.
The usage of multiple tools helps investors to have a better picture of the stock investment deal as they are more comprehensive. Thus, this should led to lower risk of making bad investment decisions while boosting the chance of making investments that are profitable.
How to Calculate Intrinsic Value?
Recently, I’ve presented a Live Webinar where I did a Live Demo on how you can easily calculate a stock’s intrinsic value in 10 minutes. It is so simple that you can apply it immediately even if you have no prior experience to stock investing. So, here are the necessary tools:
Intrinsic Value – Calculating the True Worth of a Stock in 10 Minutes
Also, you may request for a copy of the Intrinsic Value eBook and the template to calculate Intrinsic Value by following the instructions below.
Copy this Message:
Ian, I want the eBook & Template on Intrinsic Value
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The free copies are valid until August 15, 2017. They would be sold in Bursaking.com.my as a package for RM 30 starting August 16, 2017. Thus, make sure you grab your copies as soon as possible.
Stock 101 Quiz