WHATI

S SHARE

I
NTRI
NSI
DEFI
NI
C VAL
T
I
UE?
ON,FORMULA,AND CALCULAT
OR
T
ABLE
OFCONT
ENT
S
Too of
ten,especi
all
yintoday’
smar ketenvi
ronment
,thepr
iceofa s
tocki
s 1.I
NTRI
NSI
C VALUEDEFI
NIT
ION
confused wi
ththevalueofa s
tock.

Phi
lFi
sherf
amous l
ysaid,“t
hest
ockmarketisf
il
led wi
thi
ndi
vidual
swho know t
he 2.WHYDO INVEST
ORSAND
pri
ceofeveryt
hing,buttheval
ueofnot
hing.” COMPANIESCAREABOUTTHE
Butwhatexact
lyi
sthei
ntr
ins
icval
ueofa s
tock? I
NTRI
NSI
C VALUE?

3.I
NTRI
NSI
C VALUEEXAMPLES

4.HOW TO CALCULAT
ET HE
I
NTRINSI
C VALUEOFA ST
OCK?

5.I
NTRI
NSI
C VALUE
CALCULAT
OR

6.FREERESOURCES

1
WHATI
SINT
RINSI
C VAL
UE
Theint
rins
icvalueiswhata gi venas setors ecuri
tyi
sactual
lyworth.T
hepriceofa s t
ockisthecos t
youmus tpayto buysuchanas s
et,wher east heint
ri
nsi
cvalueiswhatthatassetisactuall
yworth.
Jus
tbecaus eyoupay$10f ora s har
eofs t
ock,doesnotmeant hatst
ockiswor t
h$10— i tcould be
more,itcoul
d beless.To det
er minethei ntri
nsicval
ueofanas s
et,therear
es everalvaluati
on
methodsyoucoul d use.

WHYDO I
NVESTORSAND COMPANIES
CAREABOUTTHEINT
RINSI
C VAL
UE?
Deter
mini
ng t
heint
ri
nsi
cvalueofanas seti
simpor
tant
becausei
tcanhelpinves
torsr
ecogniz
ewhet hert
he
marketpr
iceofanasseti
sunderval
ued orover
valued.

2
I
nves torssuchasWar renBuffett
,Char li
eMunger ,and
PhilFi
sher,havepopul ari
zed and broughtt othe
for
ef r
ontt heimportanceoff ocusing onval uewhen
Pres
tonPyshandSt
igBroder
senexplai
n i
nves ti
ng.T heval
ueofanas set,inrelati
ont oits
theimport
anceofi
ntr
insi
cval
ueinthis purchas epr i
ce,i
scrucialwheni nvesting becaus eitis
YouTubevi
deo. arguabl ythemos timportantfactorindet ermining the
fut
ur ereturnsofa company.

ST
OCKI
NVEST
ING T
OOL
S
Fi
nd i
nves
tment
syou’
reconf
identi
nwi
thouts
acr
if
ici
ng al
lyourf
reet
ime.

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ARTUSI
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I
NTRI
NSI
C VAL
UE PORTFOLI
O MOMENTUM PRI
CE
CALCUL
ATOR TRACKER NOT
IFI
CATI
ON

3
I
NTRI
NSI
C VAL
UEEXAMPL
ES

Let
’slookatanexampl
e.It’
sa s
impli
sti
cexample,
asthereismor
ecomplexi
tyinr
eal-
wor l
dscenar
ios
,buti
til
lus
trat
est
hepoi
nt.

AssumeI nvestorA buyscompanyABC at$100pers hare,whil

ebel i
evi
ng thecompany’ss
tocki
sworth$500pers hare.
Atthes amet ime,InvestorBbuyscompanyXYZ’sst
ockat$10pers har
ebecaus ether
eisa l
otofhypearound the
st
ock.They’ r
enots urewhatt heybel
ievetheval
uet o be,asther
e’sno consi
der
ati
ongiventotheunderl
ying s
tock’s
value,butsinceitwasonl y$10pershare,i
tmustbe“cheaper ”thancompanyABC and thehypemus tmeant her
e
arepos i
ti
vef utur
er et
urns.

Overthenextfiveyears
,bothinvestorsholdt
heirpos
iti
onsand t
hemar
ketr
epr
icesi
tsel
f,ul
ti
mat
elyr
ever
ti
ng t
o
under
lyi
ng i
ntr
insi
cvalues,asi
thist
oricall
yhas.

I
nvest
orA wasri
ghtwi
ththei
rthesi
s— thecompany’
sst
ockwasact
ual
lywor
th$500pers
har
eand t
radesatt
hat
pri
cefi
veyearsaft
ert
heystar
ted t
hei
rposi
ti
on.

However,I
nvestorBwaswr ong wi
ththei
rthesi
s.CompanyXYZ’sst
ockwasn’tactual
ly“cheaper”thanABC’sst
ocklike
I
nvest
orBt hought.I
nstead,whenal loft
hehypewor eoffand thetr
uebusi
nesspresent
ed it
sel
f,XYZwasonlyworth
$5pershare.Si
milarto companyABC’ sstock,companyXYZ’
sstockwascorrect
lypri
ced overthefi
veyearholdi
ng
per
iod and t
raded at$5pers hare.

Agai
n,thi
sisa s
impl
isti
cexampl ewit
hr ound number s,buti
til
lustr
atestheimport
anceofvalue,and being r
ightabout
t
hevalue.Inves
torA calcul
ated t
hevalueofs tockABC cor r
ect l
yand purchas
ed ata pr
icebelow t
heval ue.While
I
nves
torBgaveno cons ider
ationtotheunder l
ying valueand theref
oreult
imatel
ypurchased aboveit
.Thi
sill
ustr
ates
whyi
ndivi
dualinves
torscareaboutthei ntr
insi
cvalueofas sets.

Whennew i
nvestorsbegi
ninvest
ing i
nthestockmarket
,they’r
ealmostal
waysfocus
ed onthepr i
ce,nottheval
ue.
Thepr
iceofa s
tock,byit
self
,isi
rr
elevant
.Itmustbeconsider
ed i
nrel
ati
ontotheunderl
ying company’sval
ueto
haveanycontext.

WhenI’mspeaking wi
thnew i
nvest
ors
,Iloveto us
ethesetwo companiesasexamples:Ber
kshi
reHat
haway
(
“Ber
kshi
re”)(
Ticker
:BRK.
A)and Snap,Inc.(
“Snap”)(Ti
cker
:SNAP).Ias
knew inves
tors
,whichcompanyischeaper
?

BERKSHI
REHAT
HAWAY’
SST
OCKPRI
CEAND CHART

asoft
hiswr
it
ing

SNAP’
SST
OCKPRI
CEAND CHART

asoft
hiswr
it
ing

Everysi
nglenew i
nves
torthatIhaveas ked thatquesti
onhass ai
d Snap i
s“cheaper
”.T
heiranswerwasdri
venbya
pri
ce-bias
.Theycanclearlyseethatones t
ockcos tsnearl
y$400,000to buy,whi
let
heotheri
sunder$60.I
ftheywer
e
asked whi
chstockcostsl
ess,youcould ar
guet heiransweriscor
rect.

I
tdoescos tl
esst
o buya s
har
eofSnap thanitdoesBerks
hire’
sA s
har
es.ButIwoul
d ar
guethatSnap i
sn’
tnecess
ari
ly
cheaper.Whenwet al
kabout“cheapness”,we’
retal
king aboutt
hepri
ceinrel
ati
ontothevalue.T
heval uei
swhat
matter
s,notthepri
ce.

Pri
ceisirr
elevantwi
thoutcons
ider
ati
onoftheunder
lyi
ng val
uebecaus
eofthewayownershi
pina companyi
sspl
it
.
Let’st
hinkofanentir
ecompanyasa pie,wit
heachpieceoft hepi
eequal
ing a s
har
eofs
tock.

Youcancutup yourf
avorit
eapplepi
ei nt
o 5,8,or20pi eces
,orr
eal l
yanynumberofpiecesyouwant.Butno mat
ter
how manypi
ecesyoucutt hatpi
eint
o,you’ r
el eftwi
ththesameamountofpie.It
’st
hes amewitha company.The
companycanbes pli
tint
o asmany“pieces”,thinkst
ock,asit
’dl
ike,butt
heval
ueoft hecompanydoes n’
tchange.

T
akea companyworth$100.I
fyouspl
iti
tinto 50shar
es,eachs t
ockiswort
h$2pers har
e.However,i
fyouspl
iti
tint
o5
s
hares
,eachstocki
sworth$20.I
nthesecond s cenar
io,t
hes t
ockcosts$20to buy,whereasi
tonl
ycos t
s$2inthefi
rst
s
cenari
o,butt
hevalueofthecompanyi sthes ame— onl yt
hepr i
cehaschanged.

Rel
ated:Podcas
tEpi
sode–I
ntr
ins
icVal
ueAs
ses
smentofBer
kshi
reHat
haway

BUI
LDING AMARKET-BEAT
ING
PORTFOLI
O DOESN’THAVETO BE
AMYST ERY…
wi
thoutt
her
ighti
nves
ti
ngt
ool
s,i
t’
sgoi
ngt
ocos
tyou…

•Al
lyourf
reet
ime •You’
llwonderi
fyour
etur
nsar
easgoodast
heycanbe

•You’
llmi
ssf
indi
nggr
eati
nves
tment
sear
ly •You’
llkeepcat
chi
ngf
all
i
ngkni
ves

•Mi
ssoutont
hous
andsofdol
l
arsi
ninves
tmentr
etur
ns •Youwon’
tknow i
fyou’
rebuyi
ngatt
her
ightpr
ice

Youdon’thavetospendal l
yourtimedoi
ngmanual calculati
ons.
J
oinTI
PF i
nanceandgetever yt
hingyouneedt obecomeas uccessful
inves
tor
whodoes n’
tguessi
ftheyar
ebuyi ngatagoodpr i
ce— you’ l
lactuall
yknow
how t
obuil
dapor t
fol
i
oyou’r
econfidenti
n.

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ARTUSI
NG FORFREE

4
HOW TO CALCULATE
THEI
NTRINSI
C VALUEOFA ST
OCK?
Themostcommonwayt
o cal
cul
atea company’
sint
ri
nsi
cval
uei
sto us
ea Di
scount
ed Cas
hFl
ow Model
or“DCFModel
”.

I
fyour
ead Berkshir
eHat haway’smanual ,Buf
fettsays,“Thei ntr
insi
cvaluecanbedef i
ned si
mply.Iti
sthedi scounted
val
ueoft
hecas hthatcanbet akenoutofa bus i
nessdur i
ng itsremaining l
if
e.Asourdef i
nit
ionsuggests,i
ntrins
ic
val
uei
sanes t
imat eratherthana pricefi
gure.And itisdefinit
elyanes timatet hatmustbechanged asi nterestrates
moveorf
orecas torfut
urecas hflowsarerevis
ed.T wo peopl elooking atthes ames etoff
act sal
mos ti
nevitably
comeup wi
ths l
ightl
ydiffer
entint
rins
icvaluefi
gures.”

Whatdoeshemeanby“Cas
hthatcanbet
akenoutoft
hebus
ines
sdur
ing i
tsr
emai
ning l
if
e”?

Buf
fet
twasref
err
ing t
othi
s,“I
fIcoul
dt akeoutal
lthepr
ofi
tthecompany’
sgoi
ng t
o makeoverXnumberofyear
sI’
d
ownit
,how muchwoul dt
hatadd up t
o?”

Hediditfor10yearsintothefutur
eto comparethatamountthathewould coll
ectto whathewoul
d makeof
fofa
zer
o-r
iski
nvest
ment ,whichshould bet
he10-YearTreas
ury.T
hereasonthi
sisa z
ero-
ri
skinvest
menti
sbecausei
tis
backed bytheful
lfai
t hand cr
editoftheUni
ted St
atesGovernment.

Futur
ecashf l
owsmus tbediscounted t
orefl
ectwhatthosecashf
lowsareworthintoday’sdoll
ars
.A dol
larf
iveyears
fr
om now i
snotwor t
ha dollartoday,butwhatisi
tworth?Thedol
larf
iveyear
sfrom now mustbedi s
counted back,
givena di
scountr
ate,to calcul
atewhatit’
sworthtoday.Thes
amehappenswi thcashflows.

T
herearegeneral
lytwo wayst
o cal
cul
atet hei
ntr
ins
icval
ueus
ing t
heDCFmodel
.Let
’sl
ookatbot
hmet
hods
,
s
tar
ti
ng wi
ththediscountr
atemethod f
ir
st.

I
NTRI
NSI
C VAL
UEFORMUL
A:DI
SCOUNTRAT
EMET
HOD

I
nthef
ir
stmet
hod,f
oll
ow t
hes
tepsbel
ow:

1.Youmustforecastwhatyouexpectthecompany’ scashf
lowst
o beoverthenext10year
s;
2.Dis
countallfut
urecashfl
owsbackt ot
oday’spresentval
ueusi
ng di
scountr
ate;
3.Thensum t
hepr esentval
uet
o arr
iveatthei
ntr
insi
cvalue.

We’
llas
sumet
hef
oll
owi
ng cas
hfl
owsf
orCompanyABC:

I
nthi
sexample,Iam going t
o us
e8% asmydi scountr at
e.Thi
sincl
udestheri
sk-f
reerat
eofa 10-YearTr
eas ur
y,aswel
l
asanequit
yri
skpremium.Thiswouldresul
tina presentval
ueofjustabout$830.Remember,t
hisisfort
heent i
re
company,notpershar
e.Youmus tdi
videthet
ot alcompany’svaluebythetotalnumberofsharesoutstanding.

I
fCompanyABC has100s haresouts
tandi
ng,youmustdi
vide$830by100,whichwoul
d meaneachs har
eiswor
th
$8.
30.I
fyoucould buyi
tfor$4-
$5,youmaywantto cons
ideri
t.I
fyoucould onl
ybuyi
tfor$16-
$20,youmaynot
wanttoinves
tini
t.

I
NTRI
NSI
C VAL
UEFORMUL
A:PROBABI
LIST
IC APPROACH

Let
’sl
ookatthesamesit
uati
onusi
ng t
heprobabil
ist
icapproach,whi
chi
sbel
ieved t
o be
Buf
fet
t’sappr
oach.I
nthesecond met
hod,fol
low t
hestepsbelow:

1.Youmus tf
orecastwhatyouexpectt hecompany’ scashfl
owst o beoverthenext10years
;
2.Rathert
handi scounti
ng t
hecashfl
owsbackt othepr es
entvalueus i
ng a di
scountrat
e,
youcanappl ya weighted aver
ageappr oach,ora probabil
is
ticappr oachto eachcashf
low;
3.Thensum thos
eval uesto ar
ri
veatt
hei nt
rins
icvalue.
We’l
lus
ethesamecompanyand cashfl
ow numbersasabove,butadd a pr
obabi
li
typer
cent
age
t
o eachone,bas
ed onhow l
ikel
ywet
hinkeachist
o occur
.

Us
ing t
heabovepr obabi
li
ti
eswouldresul
tina val
uat
ionofabout$848fort
heenti
recompanyofABC.Again,you
woul
d need t
o di
videthetotalcompany’sval
uebythenumberofs har
esouts
tandi
ng t
o ar
ri
veatt
heint
ri
nsi
cvalue
ona per-
shar
ebas i
s.

Anot hervar i
ati
ont othepr obabilist
icappr oachisto choosea Year0cas hfl
ow fi
gur e,ora starti
ng point,t
henappl y
thr
eedi f
ferentgrowthrat estothes tarti
ng cashflow fi
gure,witheachgr owt hrat
ehavi ng a differ
entper cent
chanceofoccur r
ing.Int hi
scase,youwoul dsayint hebest-cases cenario,Iexpectt hecompanyt o grow at10% per
yearand t here’sa 30% thathappens .Inthemos tli
kelyscenario,thecompanywi lll
ikel
ygr ow at5% peryearand
there’sa 50% chancet hatoccur s.Int hewor st
-cases cenari
o,thecompanywon’ tgr ow atall,witha 0% growthrate,
and a 20% chanceofoccur ri
ng.Youwoul dthencal cul
atethewei ghted averageofeachs cenar i
o and arr
iveatthe
i
ntri
ns i
cvalue.T hi
sappr oachi sver ys i
mi l
artothes econd scenario wel ooked atabove,i tisjusta sl
ightl
ydiffer
ent
appr oacht o applyi
ng probabi l
it
iest of utur
ecas hflows.

I
NTRINSI
C VALUE

5
CALCULATOR

6
RESOURCES

I
nourTIPFi
nancet ool,wehavea ver ysi
mple-to-
usecalculatort
hatall
owsyouto cal
cul
ate
t
heint
ri
nsicvalueofa stock,and s
eeyourpot enti
alr
eturnsifyoupurchas
ed att
oday’spri
ce.
I
tus
esthes econd pr
obabi l
is
ticapproachthatwedi s
cussed above.

I
NTRI
NSIC VAL
UE PORT
FOLI
O MOMENTUM &PRI
CE
CALCULATOR T
RACKER NOT
IFI
CATION
Ourcal
cul
atormakesi
t Nomor espreadsheetsand Nevermi s
soneofyour
easi
ert
hanevert
ofind usi
ngmul t
ipl
eplatf
orms, i
nvestmentoppor t
uni
ti
es
t
hetr
ueval
ueofas t
ock. tr
ackyourentir
estock again,getnoti
fi
edwhen
port
fol
i
oandi tsr
eturns thepriceormoment um
ri
ghtinTI
PF i
nance. changes.

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I
fyouwouldli
ketoseea stockval
uat
iontakeplaceli
veusi
ng ani
ntr
ins
icval
uecal
cul
ator
,youcans
eea val
uat
ion
ofAut
oZone,I
nc.here,oryoucanals
o watchthevideo:

Asyoumovef orward asaninves

tor
,Ichallengeyoutorememberand cons
iderwhatPhilFi
shers
aid,“T
hes
tock
marketi
sfi
ll
ed wit
hindivi
dualswho know t
hepriceofever
ythi
ng,butt
hevalueofnothi
ng. ”

Wi
thmor
econt
ent
,feat
ures
,andupdat
esaddedr
egul
arl
y!

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nvest
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.Cancel i
ntri
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