Everything To Know About The Intrinsic Value Of Your Current Stocks

For those who are unaware, your current stocks' intrinsic value would be the actual payment you pay against the level of risk involved. There are many methods to know the real or intrinsic value of your stocks from the stock market. 


You can adjust your cash flows to know the intrinsic value of the invested stocks.


There are methods to calculate the adjusted cash flows. These are:

Discounted rate

Under this method, the value investor uses the chosen company’s WACC, the weighted average cost of capital. In this case, such a value investor can be you or an external help you hire.


The WACC includes the risk-free rate and premium of the stock volatility into the equity risk premium rate. 


This approach conveys that risky stocks are a way to earn more profits or returns. But they are also highly volatile. This discounted cash flow method reduces the cash flow expectation from the upcoming invested stock in your portfolio.


Deciding the intrinsic value of the future stocks you are interested in depends on your risk appetite using this method. 


Certainty factor

There is a probability which the value investing for beginners assigns to each cash flow from different stocks in their mind. Then they multiply the probability with the NPV or the net present value of the same stock. 


This method's actual discount rate is nothing but the risk-free rate associated with the concerned stock’s cash flow. The discount rate here is also termed as the yield rate. 


Challenges in calculating the intrinsic value of your stocks:

It is quite subjective

The value investor keeps on creating assumptions regarding the risk and returns expected from a particular stock. Therefore, the real NPV can change anytime and might not be close to the digits that arrived from the adjusted cash flow methods in advance. 


The calculation of the WACC factors is done separately

Each factor of the WACC is calculated differently and separately. There is no correlation where the calculation of the steps is concerned. Therefore, we can say that even the probability factor is subjective here. 


Multiple investors arrive at different results

If you show your portfolio to multiple value investors, they will come to different numbers. They will be using different methods and ratios.


After all, the intrinsic value calculation is based on multiple assumptions. These assumptions can be biased based on the perspective of the value investors. Therefore, there is no consistency in knowing whether the payment you are willing to pay for a stock is going to earn you real and expected profits or returns or not.



To know more in detail about the intrinsic value of your current or future stocks, refer to the link:

Post a Comment