How does estimating intrinsic value help in making investment decisions?
I always called intrinsic value as MRP (Maximum Retail Price) of stocks, so that every layman investor can understand.
Ankit Yadav, Wealth Manager (USA) and Director of Market Maestroo breaks down the art of getting the right intrinsic value.
As a Wealth Manager, I term intrinsic value as an absolute value or true value or business value of the stock. In simple terms, it is the fair value of the whole business. I always called intrinsic value as MRP (Maximum Retail Price) of stocks, so that every layman investor can understand.
For example- If one goes to a supermarket to buy some product or food, there is always the mention of MRP in the base of the product so that buyer can understand the maximum price that they have to pay.
Similarly, when you are investing, you must know (MRP) of a particular asset like whether it is a stock or index. It will help investors to assess the fair value of that investment product to avoid over-valued investments.
How does intrinsic value help in making investing decisions?
1. The first assist intrinsic value provides is helping an investor to avoid investment in over-valued products. Example- If (XYZ) stock is trading at Rs.150 and its Intrinsic value comes Rs 100, in such case investors can know after estimating (IV) that stock is over-valued. So it will help in determining whether a particular stock is undervalued or overvalued, asserts Ankit Yadav.
2. Another help it provides is risk management, by purchasing stocks at their fair value, investors can shrink the risk. There is very minimal chance of stock falling beyond Intrinsic value; if it happens it may be because of a rare incident and can be seen as an opportunity.
3. Thirdly, it provides market-beating results. If an investor can purchase stocks at their intrinsic value, they can generate market-beating return in bull run time.
Some real Stock examples of intrinsic value
2020 covid crash created a lot of opportunity and as a wealth manager, I like to share some real stock examples with their Intrinsic value.
1. Bajaj Finance- I estimated the fair value of Bajaj Finance in 2020 as Rs 2000. Luckily in the 2020 crash, it is available at that price. Now if one invest in it at its intrinsic value, he will be able to create a lot of wealth. Today on January 15, 2022, it is quoting around Rs.7800. Another example is Maruti, its IV is Rs 4800, today it is around Rs 7000. (Above reflected is for example only & investor must research before investing).
How to Estimate Intrinsic value of stocks
There are a lot of methods to reach the absolute value of stocks. Some famous methodologies are-
1. Earnings Model
2. ROE Model
3. Discount Cash Flow
4. Relative Comparison Model
5. Dividend Discount Model
Investors must learn these models to estimate Intrinsic Value, believes Ankit Yadav.
Conclusion
Lastly estimating intrinsic value and investing accordingly can enhance investors portfolio performance and also decreases the risk factor. So I always suggest before any investment that investors must have to estimate its intrinsic value to get maximum efficiency. If your stock is available above its intrinsic value, then it is considered over-valued and if it's below its intrinsic value, then it is under-valued.
Remember
Always a time comes when investment products are traded at their intrinsic value, other times maybe it is below or above that. Investing accordingly to intrinsic value always gives you an edge and market-beating return and also help in taking well-informed decision.
Intrinsic value is the soul of investing. If one can estimate, it will help them to develop the art of picking good apples out of bad apples.