Intrinsic Value (and Intrinsic Risk)

Intrinsic Value (and Intrinsic Risk)

March 25, 2008 1 Comment


Our valuation approach is simple. Investors own securities for one reason-to get paid. Stocks and bonds are simply claims on the future cash flow generated by the underlying assets. The present value of those future free cash flow streams is the Intrinsic Value of the securities.

Intrinsic Value estimates will only be as good as the estimates of the value drivers for the underlying business–sales, price, cost, margins, tax rates, capital requirements, and cost of capital-behind the calculations. These value drivers are strongly influenced by government policies.

From time to time the interactions of buyers and sellers in the asset markets result in market prices which we find to be significantly above or below the Intrinsic Value of the securities. That’s when stocks or bonds are over-valued or under-valued. Investors who consistently buy securities when they are undervalued, and/or sell securities when they are over-valued, will earn a higher-than-market return.

For a more detailed discussion, see Tracking Value.

Intrinsic Risk

Risk does not mean volatility; risk means losing your money. That happens when a business fails to deliver the operating performance embodied in the price an investor paid to acquire it. We call this Intrinsic Risk, and we measure it by explicitly estimating the probability the Value Drivers that underlie a market price fail to deliver the implied free cash flow stream.

Back to How We Think


1 Comment

  1. herb krumsick

    July 8, 2012

    Real estate has dropped in value about 40% during the last 3-5 years. I've been in the R.E. business for 46 years. I've lived and prospered thru the various up and down turns. As you say it's all about jobs. My gut feel is that NOW IS A GOOD TIME TO INVEST IN R.E.. My reasoning is that most experts in our industry feel we've hit bottom and are on our way up. The fundementals of our industry (buy low and sell high) seem to be in place. The big question is growth (we house Amercia) and jobs. I've read and listened to a lot of your information, but not enough to say I have a great feel for your opinion of our economy the next 1-3 years.

    Can you help me with this one?


    Herb Krumsick

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