Intrinsic Value

By Jason Fittler

Intrinsic value is important in the current market.

Why? It is the true value of the business you are looking to buy.

The GFC was caused because companies traded above their intrinsic value, investors and advisors lost prospective and started to trade the trend. The market will always correct itself back to intrinsic value.  In Bull markets it will trade above and in Bear it will trade below.

A definition of intrinsic value is below;

In valuing equity, securities analysts may use fundamental analysis — as opposed to technical analysis — to estimate the intrinsic value of a company. Here the "intrinsic" characteristic considered is the expected cash flow production of the company in question. Intrinsic value is therefore defined to be the present value of all expected future net cash flows to the company; it is calculated via discounted cash flow valuation.

An alternative, though related approach, is to view intrinsic value as the value of a business' ongoing operations, as opposed to its accounting based book value, or break-up value. Warren Buffett is known for his ability to calculate the intrinsic value of a business, and then buy that business when its price is at a discount to its intrinsic value.

In the current market many companies are trading below their intrinsic value, our focus is to identify these companies and bring them to your attention.

Sometimes the market favors the short term investor but right now the market favors the long term investor, the investor who can look past the short term trends and focus on buying quality business at a discount. To be a successful investor right now you need to focus on the long term, buy businesses which are undervalued and hold for income and long term growth.

Look at it this way, if you see a TV for sale at half its retail price, you buy it and go home with a bargain and feel comfortable with your purchase. The same is happening right now with shares. You can buy quality business at deep discounts.

Intrinsic value is the real value of an asset you just need to be able to look through all of the short term noise and take a long term prospective on investing and you will be way ahead of the pack.

Only the few will rise to the top, make sure you are one of them.

For more information please call me on (07) 4771 4577.

Comments

[JON LOWI]

To Jason, For the last few years Analysts and Brokers have been setting Target prices of up to $55 for BHP and up to $105 for Rio. At the same time many good analysts predict that coal and iron ore prices will come off from 2012 onwards due to more supply. Many investors including myself do not think the market will push this far? for these stocks. Maybe WPL will get to $55/60 as oil rises over the next say 5/10 years? There is such inconsistency in rating the 4 major Banks by brokers. Sometimes seems like they have their favourites? Almost looks like they draw them out of a hat every week or so? Thank-you for your fine commentary each week, its great to get down to basic common reason in ways to handle the present difficult market, until we get a sustained rise, don't know when though.