The foundational concept behind all stock valuation — what a company is actually worth, and why that differs from its market price.
This line — attributed to Warren Buffett — is the entire premise of stock valuation in one sentence. Every publicly traded company has two numbers that matter:
What the stock exchange says a share is worth right now — set by supply and demand, sentiment, news, and the emotions of millions of buyers and sellers. It changes by the second.
What the business is actually worth, based on its fundamentals — the profits it generates, the cash it produces, the assets it owns, and the growth it can sustain. It changes slowly.
The gap between these two numbers is where investing opportunity lives. When the price is well below intrinsic value, you may have found a bargain. When price is far above intrinsic value, you're likely overpaying.
If markets were perfectly rational, price would always equal value and there would be no opportunity to find undervalued stocks. But markets are made up of people — and people are driven by fear, greed, and the news cycle.
A company reports quarterly earnings 5% below estimates. The stock drops 20% in a day — even though the business's long-term earnings power hasn't changed.
In 2020, high-quality businesses like Visa, Mastercard, and Apple fell 30–40% in weeks. Their intrinsic value barely changed — the price did.
Investors pile into 'hot' sectors and dump 'boring' ones. A steady consumer staples company can trade at a significant discount to its value simply because it's unfashionable.
A single analyst changes their rating from 'buy' to 'hold.' The stock falls 8%. The business itself has not changed at all.
Benjamin Graham — Buffett's mentor — described the market as "Mr. Market": an erratic business partner who offers to buy or sell your shares at wildly different prices each day based on his mood. Your job is not to follow his mood, but to estimate what the business is truly worth and act only when his price is attractive.
Intrinsic value flows from three fundamental sources. Every valuation method you'll learn in this course is ultimately measuring one or more of these:
The sustainable profits a business generates year after year. A company earning $5 per share reliably is worth more than one earning $1 per share. Methods: P/E ratio, DCF.
Free cash flow — the real cash left over after maintaining and growing the business. Cash doesn't lie. Methods: DCF, EV/FCF.
What a company owns minus what it owes. Critical for banks, insurers, and asset-heavy businesses. Methods: Price/Book, Graham Number.
Value investing — the discipline pioneered by Benjamin Graham and perfected by Warren Buffett — can be reduced to one principle: buy assets for less than they're worth.
That means estimating intrinsic value reliably, waiting for the market to offer the stock below that value, and then buying with a buffer (called a margin of safety) to protect against errors in your estimate.
Calculate intrinsic value using one or more methods (the rest of this course).
Is the current market price below that estimate by a comfortable margin?
If the gap is large enough, buy. If not, wait. Markets always cycle back.
A stock is trading at $50. An analyst estimates its intrinsic value at $80. What does this imply?
Benjamin Graham's famous phrase 'in the short run the market is a voting machine, but in the long run it is a weighing machine' means:
Which of the following best describes 'intrinsic value'?
Our Intrinsic Value tool calculates DCF and Graham Number estimates for thousands of stocks — so you can see price vs. value at a glance.