loader from loading.io

90 - What is Intrinsic Value?

The DIY Investing Podcast

Release Date: 08/30/2020

93 - OTC Markets Business Analysis with Ralph Molina of Midstory Ventures show art 93 - OTC Markets Business Analysis with Ralph Molina of Midstory Ventures

The DIY Investing Podcast

I interviewed Ralph Molina of Midstory Ventures where we discuss a stock pick: OTC Markets. Stock Ticker: $OTCM

info_outline
92 - Discount Rates: Past, Present, and Future show art 92 - Discount Rates: Past, Present, and Future

The DIY Investing Podcast

Discount rates form the foundation for the process of stock valuation. Value investors, therefore, rationally adjust their discount rates based on their expectations for their future. Changing expectations will reduce discount rates over time.

info_outline
91 - GAAP vs non-GAAP Earnings (Amazon Deep Dive) show art 91 - GAAP vs non-GAAP Earnings (Amazon Deep Dive)

The DIY Investing Podcast

GAAP stands for "Generally Accepted Accounting Principles" and GAAP earnings represent net income available to shareholders using these accepted accounting principles. GAAP is foundational for investors trying to calculate the owner's earnings.

info_outline
90 - What is Intrinsic Value? show art 90 - What is Intrinsic Value?

The DIY Investing Podcast

Be very careful when describing an asset's "value." You need to define your terms because they matter. Intrinsic value is the Net Present Value of all future distributions of cash. (Not the NPV of Free Cash Flow) Extrinsic value is the market value as defined by others. 

info_outline
89 - All Securities are owned at all times (Investing First Principle) show art 89 - All Securities are owned at all times (Investing First Principle)

The DIY Investing Podcast

Every security or financial asset MUST be owned by someone at all times until that security is retired. This holds true for stocks, bonds, cash in the bank, QE, and any other similar financial asset. This is an investing first principle. First-principles are useful for investors seeking to develop investing strategies from the ground up. 

info_outline
88 - Satisficing: Why you should avoid attempting to maximize your portfolio returns show art 88 - Satisficing: Why you should avoid attempting to maximize your portfolio returns

The DIY Investing Podcast

Satisficing is defined as accepting an available option as satisfactory. This mental model is useful because consumers use it instead of optimizing for every purchase. Investors can learn from this behavior to improve their portfolio and investing strategy.

info_outline
87 - Cost of Growth Valuation and Asset / Earnings Equivalence show art 87 - Cost of Growth Valuation and Asset / Earnings Equivalence

The DIY Investing Podcast

Growth is not free for most companies. It costs something. The cost of growth valuation model takes into account return on invested capital when valuing stocks. Most companies have to retain earnings in order to grow.

info_outline
86 - The Tyranny of Backtesting: Why Backtests are harmful and counter-productive show art 86 - The Tyranny of Backtesting: Why Backtests are harmful and counter-productive

The DIY Investing Podcast

Investors use backtests in order to test whether a portfolio's asset allocation would have performed well in the past. The use of backtesting is harmful to a portfolio because it ignores uncertainty and overstates the value of empirical evidence.

info_outline
85 - Precisely Wrong, Roughly Right (DCFs) show art 85 - Precisely Wrong, Roughly Right (DCFs)

The DIY Investing Podcast

Discounted Cash Flow calculations and models provide precise estimates of intrinsic value but tend to be flawed. It is much better to improve accuracy by ignoring DCF and using a simple intrinsic value calculation like the Gordon Growth Model.

info_outline
84 - Would you buy your employer's stock? show art 84 - Would you buy your employer's stock?

The DIY Investing Podcast

The company you work for should be the first place you look to begin understanding how to perform scuttlebutt. Investors should analyze their employer's stock as a potential investment candidate. Culture, Quality, and Management are key areas.

info_outline
 
More Episodes

Mental Models discussed in this podcast:

  • Intrinsic Value
  • Extrinsic Value
  • Define your terms

Please review and rate the podcast

If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. 

Follow me on Twitter and YouTube

Twitter Handle: @TreyHenninger

YouTube Channel: DIY Investing

Support the Podcast on Patreon

This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline

The full show notes for this episode are available at https://www.diyinvesting.org/Episode90

Extrinsic Value vs Intrinsic Value Definition

  • Tweet:
    • “Be very careful when describing an asset’s “value.”
    • Define your terms. They matter.
    • Intrinsic value is the NPV of all future distributions of cash. (Not the NPV of FCF)
    • Extrinsic value is the market value as determined by others for any reason at all.
  • Responses:
    • This is an extreme view
    • What about Berkshire? What is their cash worth?
  • My thoughts:
    • “There is no fundamental difference between equity that doesn’t distribute cash *ever* and a bond with a 0% interest rate that not only doesn’t make interest payments but also defaults prior to returning your principal.
    • How much would you pay to own that bond?
    • “If I knew *with certainty* that a business would never distribute cash. (Dividends, buybacks, or liquidation)
    • Then the company is fundamentally worthless to shareholders.
    • It means all of its growth is for nothing because it will reach bankruptcy before giving cash.

Summary:

Be very careful when describing an asset's "value." You need to define your terms because they matter. Intrinsic value is the Net Present Value of all future distributions of cash. (Not the NPV of Free Cash Flow) Extrinsic value is the market value as defined by others. 

By focusing on intrinsic value investors can alleviate the need to predict price action in order to turn a profit. Investors, as opposed to speculators, earn their return from business performance. Therefore, it is critical to focus your time and effort on studying business performance.