What is Intrinsic Value?

True Worth vs Market Price

Intrinsic value is the true worth of a business, calculated based on its fundamentals—earnings, assets, and future cash flows. It's different from the market price, which is simply what buyers and sellers agree to pay at any given moment.

Benjamin Graham, the father of value investing, taught that price is what you pay, but value is what you get. The market price fluctuates daily based on emotions, news, and speculation. But the intrinsic value of a quality business changes slowly and predictably.

The Mr. Market Parable

Imagine you own a small business with a partner named Mr. Market. Every day, Mr. Market offers to buy your share or sell you his share at a different price. Some days he's euphoric and offers high prices. Other days he's depressed and offers bargain prices.

The key insight: Mr. Market is there to serve you, not to guide you. You don't have to trade with him at all. Wait for the days when his price is far below the true value of the business—then buy. Wait for the days when his price is far above—then sell.

In the short run, the market is a voting machine, but in the long run, it is a weighing machine.

— Benjamin Graham

Why Prices Fluctuate But Value Doesn't

Stock prices move constantly because of supply and demand, news headlines, earnings reports, economic data, and plain old human emotion. A company's stock might drop 10% in a day because of a minor earnings miss, even if the business is fundamentally sound.

But the intrinsic value of that business—its earning power, competitive advantages, and future prospects—doesn't change that quickly. This disconnect between price and value creates opportunities for patient investors.

Real Example: Coca-Cola

Let's say our analysis shows Coca-Cola (KO) has an intrinsic value of $83 per share. But today, the market is offering it at $68. That's a 18% discount to fair value.

This doesn't mean you should rush to buy. Graham would want an even larger discount—a 'margin of safety'—to protect against errors in our analysis. We'll cover this in the next lesson.