Skip to main content Skip to main content
Not investment advice. Educational reading. See Disclaimer.
L.13 · BEGINNER · 2 MIN

Intrinsic Value vs. Price

Benjamin Graham wrote: 'Price is what you pay. Value is what you get.' These two numbers — price and value — are almost never the same. In the short run, they can diverge dramatically. In the long run, they tend to converge. The entire practice of value investing is built on identifying and exploiting that gap — buying when price is significantly below value, and waiting for the convergence.

Quiz · 5 questions ↓
§ 01

Intrinsic Value is the present value of all future cash flows a business will generate over its lifetime, discounted at an appropriate rate. It is not a precise number — it is an estimate with a range. Your job as a value investor is not to calculate a perfect intrinsic value; it is to determine whether the current market price is materially above or below a reasonable range.

§ 02
DimensionMarket PriceIntrinsic Value
Set byThe collective votes of every buyer and seller in the market todayThe present value of future cash flows — a function of business quality and earnings power
TimeframeReflects today's sentiment, news, fear, and greedReflects the long-run earnings power of the business
PrecisionExact to the pennyA range — not a single number. Even the best analysts have ±20% uncertainty.
What changes it?Sentiment, macro events, technical flows, headlinesActual changes in the business: revenues, margins, competitive position, capital allocation
§ 03

The key insight: volatility creates opportunity. When market price falls far below intrinsic value, patient investors who have done their homework can buy a dollar's worth of business for 60 cents. When price far exceeds intrinsic value, those same investors can sell. The market's short-term irrationality is the value investor's long-term edge.

§ 04
Pick a company you follow. Find its current stock price and its trailing twelve-month earnings per share (EPS) — both available on our Ticker view. Calculate the P/E ratio. Now ask: if this company's earnings stayed flat for the next 10 years, how long would it take to earn back the current price? That number is the market's implied holding period. Is that a fair price for a business growing at its current rate?
§ 05
Coca-Cola's stock falls 18% because broader markets sold off. Nothing changed at the company — same brand, same distribution, same earnings guidance. From a value investor's perspective, what most likely happened?
§ 06
You buy a stock because 'analysts have $100 price target.' Stock currently at $85. 6 months later it's at $75 despite hitting earnings estimates. What went wrong?
Five questions · AI feedback

Sit with the ideas.

You estimate a company's intrinsic value at $80 per share based on its earnings power and growth prospects. The stock trades at $55. Another company you estimate at $120 per share trades at $115. Which is the better value investment opportunity?

Why:

Other lessons in this course.

  1. 01The Mechanics of Cash Flow
  2. 02Debt Defense and Credit Building
  3. 03The Student SWAN Fund
  4. 04Mastering Opportunity Cost
  5. 05Drawing the Time Line: Before Any Formula
  6. 06The Time Value of Money
  7. 07The Discount Rate Is Your Opportunity Cost
  8. 08Annuities: Streams of Equal Cash Flows
  9. 09Perpetuities, Gordon Growth, and Uneven NPV
  10. 10The Math of Compounding
  11. 11Inflation and the Cost of Holding Cash
  12. 12Businesses, Not Tickers
  13. 13Intrinsic Value vs. Price— reading now
  14. 14Meet Mr. Market
  15. 15Margin of Safety
  16. 16Index Funds as Baseline
  17. 17Reading Financial Statements
  18. 18Economic Moats
  19. 19Valuation Metrics: P/E, P/B, and FCF Yield
  20. 20Margin of Safety: The Master Concept
See it on a real ticker →