How to Calculate a Stocks Intrinsic Value

Just like with any profession there are professionally instructed leaders of industry and amateurs. That is the same for Investing. But you should know that if you are not read up on the latest value investing procedures or if you haven’t formed your own personal checklist before investing in a Company or stock? You likely are make big mistakes along the way. But with today’s post on “How to Calculate a Stock or Company’s Intrinsic Value?” This will begin giving you a foundation or basic education to thrive and become successful in Investing.

I see so many people who do let emotions control their investing strategies and future. They are bound to lose almost everything. It’s just like If your a player in the Stock Market using only your gut and other people’s money? Your a borderline Criminal, Moron and most likely a gambling Day Trader at best. And should be taken behind the Building strung up by your ankles smothered with cheap grape jelly packets from the cafeteria and left for the Bears. These day’s Quants run the show. But there is good news! This post is for the bonafide new up and coming Investors wanting to reach that next elite level in Investing. If you have ever wondered where the like’s of Warren Buffet, Seth Klarman, Howard Marks, and other Value Investing Legends get there super secret knowledge from? This post is definitely going to provide you with a foundation of how to Calculate Intrinsic Value of a Stock or Discounted Cash Flow (DCF) of a Business.

So stay tuned…This is a post you do not want to miss. Even if it is Mathematics and heavy Calculations.

Hedge Fund Managers

If you plan on opening your own Hedge Fund Shop in the future or if your a Everyday Sophisticated Investor that plans on using Calculations and Mathematics instead of Gambling and Speculating? Your going to want to lay a foundation around Value Investing using Benjamin Graham’s teachings and procedures. So it’s absolutely vital you read Benjamin Grahams “Intelligent Investor” Book. Question. What makes a Hedge Fund unique to calculating a Stock or Companies Intrinsic value or Discounted Cash Flow? Well for starters Hedge Funds typically focus on trading on the stock market. But before I begin explaining Hedge Funds in depth like so many Financial personalities around me “I have extreme ADD sometimes.” LOL So maybe I should keep on track.

What is Intrinsic Value?

The intrinsic value of something is said to be the value that that thing has “in itself,” or “for its own sake,” or “as such,” or “in its own right.” Extrinsic value is value that is not intrinsic. Many philosophers take intrinsic value to be crucial to a variety of moral judgments. STANFORD BUSINESS ENCYCLOPEDIA

If your going to understand Intrinsic Value of a Business or Stock you need to understand that the Market is just voting for the day what they price is of a Stock. It doesn’t actually value the company. We use Intrinsic Value to evaluate and make a opinion to analyse if the Company or Stock we are looking at is undervalued and a bargain. If it is not a bargain and not undervalued? Then we keep looking. What is the formula to calculate Intrinsic Value? Before I answer this basic question you must know I highly recommend you read Benjamin Graham’s “Intelligent Investor” Book. It’s Warren Buffett’s bible of sorts. But first we need to lay out to terms.

Intrinsic Value Formula and Margin of Safety. These Topics are incredibly important for making a educated and professional judgement on a company’s future. And knowing if it is worth investing in.

By the way did you miss Berkshire Hathaway’s 2022 Annual Meeting? WATCH & READ HERE!

How to Calculate Intrinsic Value of a Business?

#1 – Intrinsic Value Formula of a Business

Mathematically, the intrinsic value formula of a business can be represented as,

where FCFE_i = Free cash flow to equity in the i^th year
FCFE_i= Net income _i + Depreciation & Amortisation _i – Increase in Working Capital _i – Increase in Capital Expenditure _i – Debt Repayment on existing debt _i+ Fresh Debt raised _i
r = Discount rate
n = Last projected year

Since this formula is mathematically difficult for ADD individuals like myself who struggle with on the page formulas. I would like to make this as easy as I am able for you. Here are a few videos that go in depth. Watch the Videos below to explain the calculation and models in action. This will begin giving you a foundation to grow.

BENJAMIN GRAHAM’S INTRINSIC VALUE CALCULATION MODEL EXPLAINED

Watch this Video below for a in depth explanation by this legendary Value Investor who is Charlie Mungers Bridge Playing Side Kick Mr. Mohnish Pabrai. Mr. Mohnish Pabrai is sincerely a fantastic guy. Mr. Pabrai has been very generous with the lessons and information he gives to up and coming Value Investors/Academics. And for this reason I need to list him in my blog. The way he lay’s out all his information and lessons makes it digestible and simple to newer people like us. His resources for all Value Investors is a must see, and you should watch his Youtube Channel and Videos. 100%

Discounted Cash Flow Model

When evaluating a Company’s (FCF) Free Cash Flow currently and for the next 10 years you need to include a Average Growth Rate and also consider what your “IDEAL” return rate is that you want to include within the DCF Model. For a more easier way of explaining this I need you to watch this video below. It will give you a better understanding of “How to calculate the DCF of a Company”.

Margin of Safety

In conclusion of today’s post it seems like it would be worth it to include what I had touched on earlier, “Margin of Safety”. If you are a Hedge Fund Manager or Value Investor, or everyday Accredited Investor knowing and calculating a Company’s Intrinsic Value is incredibly useful when analysing if it is a Investment you want to make. However even though you do find the Value of a Stock or Company you need to add an extra layer of Safety to the strategy before deciding to invest. The way you do this is by adding a Margin of Safety. Benjamin Graham’s Book will give you more info on this. But if your really a Pro? You will likely want more of a tactical explanation, strategy and guidance. So I highly suggest you read Mr. Seth Klarman’s “Margin of Safety”.

To end this chapter of todays very long post, it’s ideal if I say this in conclusion. Even though you may calculate the Value of a Company or Stock? You must make a educated professional judgement if the company warrants a long term investment. Many everyday investors don’t have the temperament nor experience within Value Investing to make these correct calls. But with time and learning to be Risk Averse by, with and through failures? You will learn. I wish you all happy hunting and I do hope you learned a bunch from today’s post. It’s long over due. And let’s make something clear up front.

This post is just a short taste of what Calculating Intrinsic Value is all about. The topic and subject is so deep and wide this post is nothing compared to the expertise out there in the market. If you are a Beginner or moderate investor? Please find a mentor and study the greats/legends like Warren Buffett, Charlie Munger, Bill Ackman, Mohnish Pabrai, Howard Marks, Seth Klarman and others. Then you will begin to see “How to use this post as a spark of which direction you should go to invest in your education, experience and financial gain.”

Godspeed
JS

Business Articles, Hedge Fund Articles

Bill Ackman’s Eight Investing Principals That Make It Rain!

If you’re a serious about Investing, you will want to read today’s post on the Eight Investing Principals Wall Street Hedge Fund Manager, Bill Ackman uses as a foundational business strategy.

Most Retail and some Institutional Investors lack basics related to Investing and lack control of emotional temperament. So this is why you must study successful fund managers and re-engineer or use their strategies. Mohnish Pabrai is always laughing while saying, “He is a Shameless Copier in Business.” I admit that’s insightful.

Members of Congress have an incredible investing track record. Is it because they have inside knowledge? Or are their Advisors doing shady business on the side? Who knows! However, if you haven’t been paying attention to the Members of Congress’s investments that are listed publicly? You will likely be in for a surprise. Be sure to check them out here on Capital Trades! If you don’t know about ValueInvesting.IO you may want to check them out. They keep up to date with Congressional Members Investments. While I am on this subject?

Paul Pelosi or Congresswoman Nancy Pelosi’s Husband is a formidable Investor and has beat the Market with incredible accuracy over the years. And you may reach the conclusion that I have. Something just doesn’t add up when looking at the results and Data. However if they are using material inside information to trade by being close to Congress? I would like to think that’s highly illegal. But from my investigation it is not considered by Congressional Investigators that anything below board could be happening. Huh! That is strange. If your an Activists like most of us? You will like to keep tabs on Political Events. That’s wise.

Today I am strictly focusing on the Investing Principles from the Mr Baby Buffett of Wall Street and the King of activist investors, the talented and always respectful Mr Bill Ackman

If I could share some of the value principles Mr. Ackman and other Prominent investors have shared online? I think if you just keep being curious. And keep being a investigator? You will eventually arrive at the inescapable truth. Most value investors find from their Due Diligence Checklists. Just keep asking questions and learning as you go as a value investor. This makes the most sense. And something I learned from watching all of Bill’s Videos.

The Father of Value Investing
“Bill shared with me that Investing is something you can learn by reading.” Benjamin Graham is a man you should research if you’re interested in becoming the next Bill Ackman. Read the Intelligent Investor. I promise you will thank me later. Watching everything Warren Buffett and Charlie Munger have said on video also helps the intrinsic value of being among value investors pay massive dividends. But it’s all up to you! Do the work and do your due diligence.

What Is Bill Ackman’s Eight Investing Principals?

Simple.
Predictable.
Free cash flow regenerative dominant companies with large barriers to entry that earn high returns on capital, with limited exposure to intrinsic risk we can’t control.
Strong Balance Sheets.
Don’t need access to capital to survive.
Excellent Management.
Good Governance.
Pershing Square Capital Management.

– Bill Ackman

In conclusion for today’s post, it’s very sensible to believe that if you adhere to and strictly follow these basic principles while investing you will be in great shape. If you go back in time and look at the trades or positions Bill and his team have made that failed to perform, the principles were not followed. And this has left them exposed. So if you look at everything mentioned above and read the Intelligent Investor or even Bill’s friend Seth Klarman’s book “Margin of Safety“. You will be well on your way to outperforming average traders with the right long term horizon.

One final thought: Warren Buffett likes to remind us as Value Investors to Invest into people. This means you must look at the Person or Management your investing into. Their Character, life achievements, and the culture they have built within their company. They must have integrity and honor and leadership. And when we stop to think about all these qualities? They add up! And that is why I have personally always been “ALL-IN with Bill and the Team at Pershing Square.”

Thank you for reading and I do wish you all Success in your steps learning about Investing.
Godspeed

Investor, Financier, Writer

Kansas City & Scottsdale Arizona

Category Archives: Hedge Fund Articles