What Is Intrinsic Value? A Guide for Long-Term Investors
Share price is what the market will pay today. Intrinsic value is what the business is actually worth. The gap between them is where every real investor makes a living.
Intrinsic value vs market price
| Asset type | Source of intrinsic value | What the market price reflects |
|---|---|---|
| Shares | Future earnings and dividends | Sentiment, news, flows |
| Bonds | Coupon payments and principal | Interest rate expectations |
| Rental property | Net rental income | Local supply and demand |
| Global index fund | World corporate earnings | Aggregate of all the above |
Margin of safety: pay 70-80p for an asset you estimate is worth £1.
Key takeaways
Intrinsic value is the true worth of an asset based on its fundamental economic factors, not its current market price.
Understanding intrinsic value helps investors make rational decisions during market fluctuations.
The margin of safety concept suggests buying assets when they are priced below their intrinsic value to protect against estimation errors and market volatility.
Dividends can be a clear indicator of a company's intrinsic value as they reflect its earnings and cash flows.