Intrinsic Value

This is the first part of the article on Intrinsic Value and this is one field where a lot of research is to be done.

Intrinsic Value is quite an abstract concept but it is central to my philosophy of investing, which I have adopted from the investing genius Warren Buffet and his guru Benjamin Graham.
( If you are seriously interested in investing... I would highly recommend the book by Ben Graham - The Intelligent Investor. This is the book which took Mr. Buffet to his Guru.)

One of the most important publications in the world of investing is the Annual Report of Berkshire Hathaway. ( It's the company which Warren Buffet runs, and all the annual reports of this company are available to us on their site : www.berkshirehathaway.com ) Another interesting document on that site ( which every CEO/investor should read ) is the Owner's Manual.

Warren Buffet's definition of intrinsic value defined in one of these documents is : the intrinsic value of a stock is "the discounted value of the cash that can be taken out of a business during its remaining life."

Now that's a little too technical for "Techies" like us. We may have to keep space for further discussions on this in our next week's article too. But let us try to split which are the jargons stated by Mr. Buffet. They are :

1. the Discounted Value
2. the Cash
3. taking the cash Out of a Business
4. the remaining Life of the Business

It's very interesting to figure out the above four elements for the companies in which we are looking for investment opportunities. I would like readers of vibeindia to give names of companies in which they are looking for investment opportunities, so that we can put those companies to this test and figure out what do we mean by "Intrinsic Value" for those companies.

note : We may not tell if it is a good or bad investment, we will just try to understand the concept of "Intrinsic Value", which is core to Business like Investing.

to be continued next week.

"Mister Market "

Yes, he is the Villain who made Warren Buffet the investing Hero of the 20th Century. Knowing Mr. Market answers the basics of Stock Market functioning. If one understands this concept of market and its madness, it will automatically increase your probability to succeed in investing. So, what's the story ???

The story(sorry the concept) of Mr. Market goes something like this:

Imagine you are a partner in a private business with a man named Mr. Market. Every day, he contacts you and offers either to buy out your stake in the company or sell you his; the choice being entirely yours.

The catch is, Mr. Market is an emotional wreck! At times, he is in excessive high spirits and at others, in a dangerous state of depression.

When he is on one of his manic highs, his offering price for the business is high as well, because everything in his world at the time has rosy tinge. His outlook for the company is expectant, so he is very eager to buy your stake and only willing to sell you his stake in the company at a premium.

On the other hand, when his mood is no good, all he sees is a dismal future for the company. In fact, he is so concerned, he is willing to sell you his part of the company for far less than it is worth. While in fact the real value of the company may not have changed - just Mr. Market's mood.

The best part is that you are always free to ignore him if you don't like his offer. It won't matter to him for the next day, he'll again show up with a new offer. For your interest, the more manic-depressive he is, the more opportunity you will have to take advantage of him [don't worry, he doesn't have feelings or mind being taken advantage of.] As long as you have a strong conviction of what the company is really worth, you will be able to judiciously reject or accept Mr. Market's offers ... the choice is yours.

This is exactly how an intelligent investor should look at the stock market - each security that is traded is merely a part of a business. Each morning, when you open up the newspaper or turn on CNBC-TV18, you can find Mr. Market's prices (the stock quotes). It is your choice whether or not to act on them and accordingly buy or sell. If you find a company that is being offered for less than it is worth, take advantage of him and "stock" up on it. Surely enough, as long as the company is fundamentally sound, one day the stock market will come back under the sway of a manic high and offer to buy the same company from you for a much higher price!

By thinking of stock prices in this way - as mere quotes from an emotionally unstable business partner - you are free from the emotional attachment most investors feel toward rising and falling stock prices. When you are looking to buy stock you will in fact welcome falling prices. The only time you want to invite high stock prices is when you are eager to sell your securities for some reason. Thankfully, in most cases, you are free to wait out Mr. Market's emotional roller coaster until he offers a price that you consider equal to or higher than its intrinsic value (what's that?...we will find the answer soon ).

This is perhaps your greatest advantage in your investments - Take the Advantage from Mr. Market.