Learn The Easiest Valuation Method For Stocks, In Minutes!
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Learn the Easiest Valuation Method for Stocks, In Minutes!

Valuation methods or quantitative analysis is being used to predict the changes in stock price and it can be done for a number of reasons such as measurement, performance evaluation or valuation of a financial instrument. A business or financial analysis technique that seeks to understand behavior by using complex mathematical and statistical modeling, measurement and research. By assigning a numerical value to variables, quantitative analysts try to replicate reality mathematically. Today, we are going to find out what is intrinsic value of stock? How to calculate an intrinsic value? And learn one of the easiest method in valuating a stock.

Welcome to Session # 3c - What is intrinsic value of stock? Learn the easiest valuation method for stocks, in minutes!

Previous Session # 3b, we have walked through the 7-criteria to identify a great company. In this session, we are going to find out the easy way of valuating a stock.

You may ask "what the heck is intrinsic value"? "How do you find the hidden gems in stock market? Or "How do you determine an actual value for a company (or stock)"?

I sum up THREE crucial questions to discuss in this particular session, which inclusive of:-

How to define intrinsic value?

How to determine an intrinsic value of a stock?

How much am I willing to pay?

From years of mistakes and lessons learned. I reckon that to make a CORRECT judgment, I must first calculate an intrinsic value of a stock, then, follow by finding the fair price that the market and (the price) I am willing to pay for that particular stock.

Let's move on to more detail...

What exactly is intrinsic value of stock?

what is intrinsic value of stock

In finance, intrinsic value is defined as the (real) value of a company, stock, currency or product determined through fundamental analysis without reference to its market value. It is also called fundamental value. The value ordinarily calculated by summing the discounted future income generated by the asset to obtain the present value.

Why must I calculate an intrinsic value of a stock?

what is intrinsic value of stock

The answer is rather straight forward. Every company is worth investing for one simple reason: Because of its ABILITY and CAPABILITY to make money, for at least 10 years.

And for this reason, a more profitable company and highly capable in money making company will WORTH HIGHER than the less capable money making company.

How to work out an intrinsic value of a stock?

how to calculate an intrinsic value

There are various WAYS to calculate an intrinsic value of a stock. (You may also refer to previous page and post).

I use discounted-factor to calculate the CASH-FLOW that generated by a company for at least 10-years period from now.

Example:

Let's examine Birkshire Hathaway - A,

1st, calculate the (cash-flow) growth rate of Birkshire Hathaway - A

2nd, project NEXT ten years cash flow for Birkshire Hathaway - A

3rd, calculate the Discounted cash flow

4th, sum up the total discounted cash flow

5th, Total discounted cash flow divided by total of shares = Intrinsic value per share

Growth rate of Birkshire Hathaway - A:-

10 years growth = 10^((log $27,704/$7,405)/9)

= 15.79%

5 years growth = 10^((log $27,704/$15,846)/4)

= 14.99%

*Average growth = 17.62%

(Average of 2 ~ 10 years growth)

Year # 1 Projection = $31,440.90

Year # 2 Projection = $35,681.86

Year # 3 Projection = $40494.87

.

.

.

Year # 10 Projection = $98,190.09

Total = $593,043.25

Intrinsic value = Total discounted cash-flow projection divided by total share

= $593,043.25/2

= $296,521.85

Current price (dated 19th Dec 2014) = $227,886.00

What does it mean?

how to define intrinsic value

It means... Good news! When current price is LOWER than intrinsic value, it shows FIRST indication of this company that is WORTH spending our time to proceed or to find out whether it is a right moment to BUY in the share.

Bad news is... It is NOT the END of the process. As mentioned earlier of this session, we need to ask: “How much am I willing to pay?”

Since my intention is to BUY and HOLD for at least NEXT TEN YEARS, I don't want to buy in a company that DOES NOT fit ALL my criteria and benchmarks. I reckon that I just have is to study a bit harder, and spend a little more time before invested my hard earned money. For this reason, I sincerely invite you to move on to my following detail study of all the above doubts, steps, yardsticks and homework. JOIN me in Keys Value Investing and my Google Plus Community.

Frankly, when I first involved in value investing, whenever the FIRST indication was showing green light, I would jump in and buy. But often ended up with frustration or losing money.

HOWEVER, later, I have learned that, jumping in too EARLY into something that we have JUST found (its FIRST signal) is rather over-react.

Even though I have found that the undervalued stock, I've learned to ask:

How much am I willing to pay? Or why the market still reluctant to realize its real value?

Or the current price ALREADY being over-speculated as compare to its historical PE ratio, overall-growth rate and management behind the company? What sort of fair growth

rates for the company?

Conclusion

what is intrinsic value of stock

The dilemma of excitement, eagerness and time-concerned of finding a company that selling BELOW its intrinsic value is comprehensible and acceptable, because I was “there” before. My humble solution to this dilemma is to do a little MORE! A little more homework and study as opposed to others will make a lot of different.

How to get started without wasting unnecessary time and efforts?

1. Try out recommendations from experienced investors who's willing to share

2. Ask questions (Feel free to contact me)

3. Be organized - Example: I follow strictly to all stocks screening process, yardsticks, benchmarks, criteria, steps and homework...that I've learned. Besides all the investment-know-how, I am also expanding into time management skills as well as social networking skills.

Hope this helps.

If you ever need any feedback or support regarding with the investing know-how and brainstorming discussion, I would be more than happy to connect. Simply leave your comments below and make sure you visit my site regularly as I am always updating it with lots of “A-ha” ideas and information that I come across and I guaranteed that you will find interesting.

Stay tuned, and we will move on to... Session # 4: How to find the best online brokerage account

Posted by Mike.


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