Intrinsic Value Investing

Intrinsic Value Investing was born from the need to address and manage two fundamental risks when investing

  • The unpredictability of the future, and
  • Investments which are not supported by an appropriate economic value.

The consequence for mishandling these risks is usually a permanent loss of capital.

Intrinsic Value Investing relies on two observations that address the fundamental risks of investing:

  • If a financial security represents a fractional interest in a business, its value must be proportionate with a reasonable estimate of the value of the underlying business
  • As markets can be irrational and value securities well above or below what a common sense value of the underlying business would warrant, market prices cannot be relied upon to assess the value of a business. However this irrationality provides opportunities.

These two observations lead to the two core principles of Intrinsic Value Investing:

  • First, assess independently the Intrinsic Value of any proposed investment based on the common sense, business value of the fractional interest in the underlying business the security represents.
    The notion of Intrinsic Value can be extended to other financial instruments when a common sense valuation of what a security should be worth can be reasonably ascertained.
  • Second, buy only when a satisfactory Margin of Safety can be established. The Margin of Safety of an investment is equal to its Intrinsic Value minus the price at which it can be purchased.
    The cheaper the price of the security, the larger the Margin of Safety for the investor. Cheap prices – large Margins of Safety – make for safer investments, by providing increased protection to the capital from future business uncertainty, uncertainties in the valuation, and the reality that one cannot know all the risks that could affect an investment.

The underlying assumption for future success is that, however long it takes, markets or business interests will, in time, recognize the intrinsic value of a security. This will allow the investor to sell the security as its price moves toward its intrinsic value; potentially generating a gain comparable to the Margin of Safety established at the time of purchase.

The section Resources / Investment Selection details our criteria for investment research and selection.

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