Intrinsic Value Calculation

[robertbanking]

Hello you wonderful and intelligent people that make up these forums, i truly hope you are having a pleasant week and doing well.

I am wanting to further learn about calculating Intrinsic Value and certain formulas for valuing a company. I have heard that learning from YouTube videos is not really the best way. I am wanting to learn how to calculate Intrinsic Value and an example of how the calculation is carried out, such as where the figures for the calculation are obtained from. I kindly wondered if anyone knows any books or resources that would help me calculate this please? There is resources online but these tend to just show the Intrinsic Value formula. If anyone could kindly help me with this i would be forever grateful and thankful for your support with this, it would be more appreciated than you may know.

Sending you lots of good wishes and i truly hope you become massively successful with your investing. Thanks to all the wonderful people on these forums that post so many informative posts and help others you are truly wonderful. Very best wishes to you and take care.

[Dicky99]

So as I understand it the intrinsic value of a stock involves determining what price that stock would need to be today to exactly match the total return of a chosen risk free investment over the same time period. So for e.g. for a ten year investment timeframe, calculating what price BDEV would need to be today for it's expected return to match the known return on a 10yr gilt. The lower today's price is compared it's calculated intrinsic value, the more interest it might attract.
To get to that break even intrinsic value you need make best guesstimates, using historic data and conservatism, about both the dividend yields and the book value growth. Easier to do with mature stable companies than it is with growth companies.
The information on historic and projected dividends and book value are easily obtainable from your chosen platform. II use morningstar data.
The difficult bit, for me at least, was designing an Excel spreadsheet to do the work. In the end I didn't act on any of my resulting outcomes because I didn't have enough conviction in my results to wait 10 years to find out if I'd got it right

[simoan]

Please bear in mind this is just my opinion. Save yourself a lot of time and effort and do not bother trying to calculate Intrinsic Value, especially if it involves a Discounted Cash Flow (DCF) analysis. Utter waste of time.

[scrumpyjack]

Please bear in mind this is just my opinion. Save yourself a lot of time and effort and do not bother trying to calculate Intrinsic Value, especially if it involves a Discounted Cash Flow (DCF) analysis. Utter waste of time.

Quite so, it involves an awful lot of subjective guesses. By the time that 10 years is up, the one thing you can be virtually of is that your IV estimate will be wildly wrong. Anyway the market will again be looking to the future, and the SP will reflect the market's obsessions, hysterias etc, not some pseudo mathematical calculation.

With larger companies at least you can also be sure that the market knows more than you.

As some famous guru said (Buffet?) - in the short term the market is a voting machine, in the long term a weighing machine

[SalvorHardin]

Please bear in mind this is just my opinion. Save yourself a lot of time and effort and do not bother trying to calculate Intrinsic Value, especially if it involves a Discounted Cash Flow (DCF) analysis. Utter waste of time.

Agree 100%. DCF is as bad as EBITDA for valuing shares IMHO

Intrinsic value calculations use DCF, turning future cash flows into present day money by discounting them using a valuation interest rate. I used to do them regularly when I was an Actuary, but only for fixed interest, final salary pension liabilities and estimated general and life insurance claims.

DCF is extremely useful when valuing a series of known payments (e.g. fixed interest investments). When the cash flows are less reliable (e.g. shares) DCF becomes more unreliable. Even more unreliable when you look further into the future.

Often people will quote a DCF valuation for a share without quoting the interest rate used to discount the future cashflows, which makes the valuation even more useless. Many people like DCF because the maths makes it seem more scientific and thus accurate (whereas it is spurious accuracy).

Intrinsic value DCF calculations for all sorts of assets became popular after a book was published in the 1990s which claimed that Warren Buffett routinely used DCF for valuing shares. He doesn't; Charlie Munger says that he has never seen Buffett do a DCF calculation.

[Whatsitworth]

But that’s why buffet never invested in technology stocks because he wasn’t able to predict the future cash flows. He always said he’s too hard to value pile is a hundred times bigger than his easy to value pile.
He always said if he couldn’t print out the cash flow like a bond coupon he wouldn’t invest. He invested in apple because he sees it as a consumer goods company, not a tech company.

Then again iv also seen Charlie say Warren never did a dcf so who bloody knows

[Charlottesquare]

Please bear in mind this is just my opinion. Save yourself a lot of time and effort and do not bother trying to calculate Intrinsic Value, especially if it involves a Discounted Cash Flow (DCF) analysis. Utter waste of time.

Agree 100%. DCF is as bad as EBITDA for valuing shares IMHO

Intrinsic value calculations use DCF, turning future cash flows into present day money by discounting them using a valuation interest rate. I used to do them regularly when I was an Actuary, but only for fixed interest, final salary pension liabilities and estimated general and life insurance claims.

DCF is extremely useful when valuing a series of known payments (e.g. fixed interest investments). When the cash flows are less reliable (e.g. shares) DCF becomes more unreliable. Even more unreliable when you look further into the future.

Often people will quote a DCF valuation for a share without quoting the interest rate used to discount the future cashflows, which makes the valuation even more useless. Many people like DCF because the maths makes it seem more scientific and thus accurate (whereas it is spurious accuracy).

Intrinsic value DCF calculations for all sorts of assets became popular after a book was published in the 1990s which claimed that Warren Buffett routinely used DCF for valuing shares. He doesn't; Charlie Munger says that he has never seen Buffett do a DCF calculation.

I concur, DCFs have a use at project level, evaluating business investments, but at whole company level there are far too many moving cogs.

I gave up trying to use even dividend models to calculate whether or not to invest (Gordon Model) as even that has too many assumptions buried within the calculation. These days I use a moody P/E ( E is unreliable) a filch within the notes and gut feeling ( this got me to Springfield which launched itself even further south yesterday so is likely not much of a recommendation)

The only reasonably accurate company valuations I have ever managed to do are with the private companies that employee me but there I know all the debits and credits making up the profits, with published accounts an outsider cannot ever fully see the accounting so no matter how precise the actual calculation he/she is generally flying blind.