Intrinsic Value - A Subjective Fake Motivation Number
I have been trying to come up with a way to calculate intrinsic value.
Over the years, I developed many ways to find out the intrinsic value (Just read my blog, look at Fundamental Scorecard or look at Moat Scorecard).
However, as I get more involved in overseas companies, especially the US market, my thinking starts to evolve again.
Don’t get me wrong. I still use my past methods on calculating intrinsic value for companies in SG and HK.
However, they are not workable for US market. US market at times looks at more qualitative rather than quantitative. Many companies are what I deem as – a company with a story, not back by financials.
Furthermore, I do not understand how can one hold a company who share price has grown for 10x for example.
So recently my Fundamental Scorecard Telegram Group had a discussion on Intrinsic value.
Before I continue, please ensure that I do note that Intrinsic Value (V) is NOT EQUAL to Share Price (P).
So back to the discussion - there was a line by a member stating that “if enough people believe in it, then V becomes a real thing.”
This brings me back to Ben Graham famous line - in the short run, the market is like a voting machine (tallying up which firms are popular and unpopular). But in the long run, the market is like a weighing machine (assessing the substance of a company).
Basically, I want to find a company where P is below V and remains unpopular. But eventually I will want more people to recognize this company where P = V.
To allow more people to recognize this company, it brings me back to Warren Buffet famous line – Buy wonderful companies at fair price.
So, if I purchase WONDERFUL or UNPOPULAR companies at FAIR prices and hold for the LONGER term (in my opinion, 3 years), I will be able to allow more people to recognize the V of the company and the P will eventually mean V.
Then there are 2 others problems that I realize in my concept of V.
In the past, I tend to look at V with a conservative mindset. This is to allow for a bigger margin of safety because concept of V is SUBJECTIVE. Because of this, my V is low. This resulted in anchoring bias within my perspective. But the problem here is if I buy wonderful companies at fair prices? Why should I be conservative about a SUBJECTIVE number?
The next problem is CONVICTION. There are many times I bought into companies with known major risk (Example: IGG). This creates a limitation to my conviction to hold, as I always have the major risk at the back of my mind. At the end of the day, “noises” may eventually result in me making rash decision.
Thus, in short, I believe in future purchases I should:
- Have more conviction in my investment. This can be done by finding pros and mitigating cons. No cons should be left behind.
- Allow my calculation to look at the highest limit of V. Find the range.
- Continue to find wonderful companies at fair prices or Unpopular companies at low prices.
Nevertheless, this brings me to another set of questions - My investing strategy. Its probably time to relook at them and come up with a way to analyse them.