Intrinsic value

What an asset is worth on the basis of what it will produce for its owner, independent of what anyone is currently willing to pay for it.

Example

A share may trade at 40 while an investor's own estimate of what its future cash is worth today comes to 30.

Important

It is an estimate produced by a person, not a property of the asset that exists to be discovered. Two careful investors can reach different intrinsic values from the same facts and both be reasoning correctly.

Related terms

• Valuation — An estimate of what an asset is worth, as distinct from the price it currently trades at. Built from what the asset produces plus judgements about growth, duration and required return.
• Discounted cash flow — Valuing an asset as the money it will produce, with each future amount reduced to reflect that money arriving later is worth less than money arriving now.
• Margin of safety — The gap between what you pay and the value you believe an asset has - deliberate room for the estimate to be wrong.

Lessons that explain it

• Why valuation is a range, and never a number — Every valuation method takes uncertain inputs and multiplies them together, so the output is a band rather than a figure. The habit worth building is refusing to collapse it. (9 min)
• What each method is for, and what to do when they disagree — Three methods on one asset produce three different answers, and the disagreement is the most useful output. Averaging it away destroys the only thing the exercise produced. (10 min)

All 578 terms in the Investing glossary