Lesson 8: It’s All About Intrinsic Value

Value investing 101: introductory course

In the previous lessons, we laid a solid foundation. We talked about why you should stay within your Circle of Competence and how to recognize good companies.

Today, we’re making the leap to a crucial part of value investing: estimating a company’s value. Not what the market is willing to pay, but what the company is actually worth. This is what we call intrinsic value.

It’s impossible to invest wisely without fully understanding this concept.

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What is intrinsic value (and why should you care)?

Imagine you're looking to buy a house. You see two properties for sale: one costs €150,000, the other €500,000. Which one is cheaper?

If you only look at the price, the answer seems obvious. But what if the €150,000 house is in terrible shape and needs €20,000 a year in repairs, while the €500,000 villa is move-in ready, located in a prime area, and can be rented out for €30,000 a year?

Suddenly, things look different.

The cheapest home isn’t the one with the lowest price tag — it’s the one that gives you the most value for what you pay.

The same goes for stocks.

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Price ≠ Value

The stock market constantly speaks in prices. But as an investor, your job is to listen for value.

A €500 stock can be a bargain, while a €5 stock might be outrageously expensive.

Because what you pay is not the same as what you get.

📌 “Price is what you pay. Value is what you get.”
— Warren Buffett

And yet, many investors make that exact mistake: they buy a stock because it's "low" or because it recently dropped in price. They confuse a falling price with a good deal. But unless you know the underlying value, that kind of purchase is just guessing with your money.

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The Money Tree: A Simple Analogy for a Complex Idea

Let’s break it down with a concrete example.

Imagine you own a tree that produces €500 worth of ‘money fruit’ each year, for ten years. In total, that tree will earn you €5,000.

So, what’s a fair price for the tree?

At first glance, you might say: “The tree is worth €5,000.” But that’s not quite right. Because the money comes in over ten years, and during that time, you could be investing elsewhere.

That’s why you should never just add up future earnings to determine what something is worth. You need to factor in the time value of money and opportunity cost.

That means asking:

• How much would I have to invest today to end up with €5,000 over ten years?

• What return would a similar investment with the same risk give me?
  
  

Let’s say a safe bond gives you a 6% annual return. In that case, the money tree is worth just €3,680 today.

That’s the net present value of the future €500 income streams, adjusted to today’s money.

That amount — €3,680 — is the intrinsic value of the tree.

If someone tries to sell it to you for €4,500, you politely decline. You know you could earn more elsewhere at lower risk.

But if they offer it for €3,000? Now it’s interesting.

That exact logic applies to businesses too.

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Businesses Are Money Trees

A business is simply a tree that (hopefully) generates money year after year.

So, as a value investor, your job is simple: ➡️ Estimate how much cash that tree will produce in the future
➡️ Discount those cash flows back to today
➡️ Then figure out the maximum price you're willing to pay to get a decent return

The challenge? Unlike our money tree example, you don’t know exactly what a business will earn. So you have to rely on estimates, based on analysis, common sense, and experience.

As Buffett puts it:
“Intrinsic value is the discounted value of the cash that can be taken out of a business during its remaining life.”

In other words:

• How much cash will the company generate?

• How certain are you about that?

• What return do you want on your investment?

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Intrinsic Value Is Not an Exact Science

Buffett calls it an “essential but vague concept.” And that’s an important point.

Because if you think you can calculate a company’s value down to the exact euro with one perfect formula… you’re missing the point.

Intrinsic value is always an estimate.

Not a precise number, not a price target, and definitely not a crystal ball.

Even experienced analysts come to different conclusions — based on different assumptions about growth, margins, interest rates, or market risks.

That’s why Buffett also said:
“We never publicly share our valuation of a stock, because two people with the same data will almost always come to different numbers.”

What matters is that you can make a reasonable estimate of a company’s value — based on what you know and understand — and compare that to the market price.

If the market offers you a stock at a much lower price than your estimate, that’s a buying opportunity.

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Why All of This Matters

Investing is, at its core, about one thing:

Buying as much value as possible for as little money as possible.

You can only do that if you learn to estimate value.

Without that skill, you’re at the mercy of Mr. Market’s mood swings. You’ll end up buying based on tips, hype, or whatever happens to be trending. That’s not investing — that’s speculating.

Intrinsic value is the anchor that keeps you grounded when the market is whipped around by fear or euphoria.

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In Summary

✅ Price is visible, value is hidden
✅ You need to learn how to estimate what a company is really worth
✅ That’s based on future cash flows and alternative returns
✅ Intrinsic value is an estimate — not a precise science
✅ The gap between price and value? That’s your potential return

In the next lesson, we’ll take a look at a few valuation methods.