Intrinsic Value of Stock
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Successful long term investors consider the intrinsic value of stock before buying and when deciding to sell. This approach to stock investing goes back to the black days following the 1929 stock market crash which ushered in the Great Depression. Benjamin Graham taught investors that they did not need to play the market as though they were picking numbers on the roulette wheel. Rather he taught investors to do fundamental analysis of stocks in search of forward looking earnings. At the same time investors learned to consider what features of a stock provided a safety net in times of trouble. This was the margin of safety that some stocks have in the form of money in the bank, unencumbered property, or products that are unassailable in their market niche. Successful stock investing became a matter of thoughtful analysis and not a matter of guess work.
What Is the Intrinsic Value of Stock?
Think of intrinsic stock value as the fundamental value of the stock. Analyze the stock to determine its price based on predicted future income and then subtract the current stock price. Calculate expected company cash flow and then discount to current dollars. Determining intrinsic value of stock is a discounted cash flow valuation. The key to determining intrinsic value of stock is getting a clear idea of the medium and long term prospects of the business in question. Successful stock investors learn to judge how well a company will manage its assets, products, costs, R&D, and marketing. When the picture is clear an investor can make an informed decision. If the market price is less than the intrinsic value of stock it is time to buy and if one owns the stock and the prices are reversed it is time to sell.
2. Successful long term investors consider the intrinsic
value of stock before buying and when deciding to
sell.
http://www.profitableinvestingtips.com/stockinvesting/intrinsic-value-of-stock
3. This approach to stock investing goes back to the
black days following the 1929 stock market crash
which ushered in the Great Depression.
http://www.profitableinvestingtips.com/stockinvesting/intrinsic-value-of-stock
4. Benjamin Graham taught investors that they did not
need to play the market as though they were picking
numbers on the roulette wheel.
http://www.profitableinvestingtips.com/stockinvesting/intrinsic-value-of-stock
5. Rather he taught investors to do fundamental
analysis of stocks in search of forward looking
earnings.
http://www.profitableinvestingtips.com/stockinvesting/intrinsic-value-of-stock
6. At the same time investors learned to consider what
features of a stock provided a safety net in times of
trouble.
http://www.profitableinvestingtips.com/stockinvesting/intrinsic-value-of-stock
7. This was the margin of safety that some stocks have
in the form of money in the bank, unencumbered
property, or products that are unassailable in their
market niche.
http://www.profitableinvestingtips.com/stockinvesting/intrinsic-value-of-stock
8. Successful stock investing became a matter of
thoughtful analysis and not a matter of guess work.
http://www.profitableinvestingtips.com/stockinvesting/intrinsic-value-of-stock
9. What Is the Intrinsic
Value of Stock?
http://www.profitableinvestingtips.com/stockinvesting/intrinsic-value-of-stock
10. Think of intrinsic stock value as the fundamental
value of the stock.
http://www.profitableinvestingtips.com/stockinvesting/intrinsic-value-of-stock
11. Analyze the stock to determine its price based on
predicted future income and then subtract the
current stock price.
http://www.profitableinvestingtips.com/stockinvesting/intrinsic-value-of-stock
12. Calculate expected company cash flow and then
discount to current dollars.
http://www.profitableinvestingtips.com/stockinvesting/intrinsic-value-of-stock
13. Determining intrinsic value of stock is a discounted
cash flow valuation. The key to determining intrinsic
value of stock is getting a clear idea of the medium
and long term prospects of the business in question.
http://www.profitableinvestingtips.com/stockinvesting/intrinsic-value-of-stock
14. Successful stock investors learn to judge how well a
company will manage its
assets, products, costs, R&D, and marketing.
http://www.profitableinvestingtips.com/stockinvesting/intrinsic-value-of-stock
15. When the picture is clear an investor can make an
informed decision.
http://www.profitableinvestingtips.com/stockinvesting/intrinsic-value-of-stock
16. If the market price is less than the intrinsic value of
stock it is time to buy and if one owns the stock and
the prices are reversed it is time to sell.
http://www.profitableinvestingtips.com/stockinvesting/intrinsic-value-of-stock
17. A Formula for
Calculating Intrinsic
Value of Stock
http://www.profitableinvestingtips.com/stockinvesting/intrinsic-value-of-stock
18. Here is the original formula that Benjamin Graham
suggested as modified in 1962 and again in 1974.
http://www.profitableinvestingtips.com/stockinvesting/intrinsic-value-of-stock
19. Preceding twelve months earnings per share, EPS
A constant of 8.5 representing an expected price to earnings
ratio, P/E ratio, for a company that is not growing
g being an estimate of long term growth (five years)
A constant = 4.4, the average yield of high grade corporate
bonds in the early 1960 decade
Y = The current yield of AAA corporate bonds
V = intrinsic value
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20. The formula is as follows:
V = (EPS x (8.5 + 2g) x 4.4)/Y
http://www.profitableinvestingtips.com/stockinvesting/intrinsic-value-of-stock
21. Once the investor had determined the intrinsic value
of a stock he compares that number to the current
market price.
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22. Intrinsic value divided by current price is referred to
as the Relative Graham Value or RGV.
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23. . An RGV of more than one indicates a buy and an
RGV of less than one indicates that one should
ignore the stock or sell if it is already in one’s
portfolio.
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24. Practical Daily Use of
Intrinsic Value Stock
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25. One needs to adjust the 4.4 value in the equation for
current treasury yields.
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26. In addition one needs to use a crystal ball to
determine when the Fed will cut back on its stimulus
program which will send treasury rates up.
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27. Inflation is accounted for in the equation by way of
treasury yields.
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28. To the extent that the Fed becomes far more
influential in driving inflation to avoid
deflation, devaluing the USD to promote exports, or
other politically motivated acts intrinsic value of stock
may be more difficult to predict.
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29. Nevertheless this is still a valid concept and along
with finding the margin of safety of a stock helps long
term investors make rational decisions in buying and
selling stocks.
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