Intrinsic Value

More than seventy years ago, Ben Graham framed a radical idea for his time: the value of a stock should be assessed independently of its market price. If that independently assessed value differs meaningfully from the quoted price, the investor has an opportunity—or a warning.

Graham called this independent estimate intrinsic value. Others have used different labels, but the idea remains unchanged: value is grounded in economic reality, not in market quotations. At its core, Graham defined intrinsic value as what is justified by fundamentals—assets, earnings, dividends, and prospects. While many factors can influence value, he argued that one stands above the rest: a business’s long-term earning power. Estimate those sustainable earnings, apply a sensible capitalization, and you have a working approximation of value. More recently, Joel Greenblatt distilled this into a single sentence that captures the entire discipline: “Value investing is determining what something is worth and paying meaningfully less than that”. The practical follow-up question then is: How exactly do you determine what something is worth?

There is no formula — and that is the point.

Valuation Is a judgement

Intrinsic value is not produced by a spreadsheet. It is not the output of a formula that transforms inputs into a precise number. It is an estimate—formed through judgment, experience, and careful reasoning. Warren Buffett’s definition reinforces this reality. He describes intrinsic value as the present value of the cash that can be taken out of a business over its remaining life. That definition naturally leads investors toward discounted cash flow thinking. Yet Buffett is equally clear that intrinsic value is never a precise figure. Two thoughtful analysts, working from the same information, will arrive at different conclusions.

That variability is not a flaw—it is a feature. Valuation requires weighing qualitative and quantitative factors together: operating history, profitability, capital intensity, balance sheet strength, competitive advantages, reinvestment opportunities, and management quality. These elements cannot be cleanly reduced to a single equation.

In that sense, valuation resembles underwriting or appraisal more than engineering. It improves with repetition, pattern recognition, and disciplined thinking.

Think Like a Private Owner

One of the most useful ways to frame intrinsic value is to step outside public markets. Imagine you are buying the whole business, not just a few shares. What would you reasonably pay for the cash the business can generate over time?

This private-owner mindset focuses attention on the important criteria: cash generation and durability. The question becomes less about quarterly results and more about what the enterprise can sustainably produce for its owners under normal conditions.

Seen this way, intrinsic value is simply private owner value.

Earnings Power

All valuation roads eventually lead to earning power. Graham emphasized this repeatedly, even though he is often caricatured as backward-looking. The past matters only insofar as it helps us understand what a business can earn on average in the future.

A practical way to think about intrinsic value is to reduce it to two questions:

1. What does this business earn in a normal year?

2. What is that earnings stream worth to me?

“Normal” is the key word. You are not forecasting peak margins or trough conditions. You are estimating what the business can reliably generate after maintaining its competitive position—what an owner could reasonably expect to take out over time.

Growth matters, but only in how it affects earning power. A business that can reinvest capital at high returns and grow earnings steadily is worth more than one that merely distributes static cash flows. The distinction is not academic—it directly influences what multiple a rational buyer might apply.

Favor Businesses That Can Be Understood

Not every business lends itself to sound valuation. Each investor operates within a circle of competence, and that circle is necessarily limited. Businesses with stable operations and predictable cash flows are easier to value than those with erratic results or rapidly changing economics. Graham acknowledged this explicitly: the more unreliable the past as a guide to the future, the less useful value analysis becomes.

This is not a weakness—it is a filter. If normal earning power cannot be estimated with reasonable confidence, the correct response is often to move on.

Simplicity

Investing does not require complexity. It requires clarity. If you cannot form a sensible view of what earnings might look like several years from now, no amount of modeling will fix that. Precision in inputs does not compensate for uncertainty in fundamentals.

Many investors overcomplicate valuation in search of certainty that does not exist. Intrinsic value is not a single number etched in stone; it is a range. You do not need to know whether earnings will be $10 or $11 per share. You need to know whether the business is meaningfully undervalued relative to its earning power.

A Real-World Analogy

Consider a property that produces $20,000 annually. What would you pay for it? The answer depends on context. A stable neighborhood may justify one price. A growing area with redevelopment potential may justify another. Optionality—such as excess land or expansion opportunities—can materially increase value.

The logic is identical for businesses. Value depends not just on current earnings, but on durability, growth, and future possibilities.

The Logic of Intrinsic Value

When evaluating any investment, the questions remain the same:

● What can this business earn?

● What is that worth to a rational owner?

Everything else is secondary.

Models can be useful tools, but they often create an illusion of accuracy. The real world is not static, and valuation is not exact. It is interpretive.

Intrinsic value, properly understood, is simply common sense applied rigorously to future earning power. The objective is not accuracy, but the identification of clear mispricing—situations where the relationship between price and value is so skewed that time and business fundamentals can do the heavy lifting.