What you will learn
- Explain the difference between what a company costs and what it is worth
- Define market value and intrinsic value and where each one comes from
- Understand Benjamin Graham's Mr. Market and why you never have to trade
- See why intrinsic value is an estimated range, not a precise number
Unit 2 taught you to read what a company is. This unit teaches you to decide what it is worth, which is a different and harder question. All of valuation rests on one distinction you must hold firmly in mind: the difference between what the market is charging for a business today and what that business is actually worth. This is the exact idea from Unit 1, that price is an opinion, now turned into a discipline you can act on.
Introduction to valuation (Aswath Damodaran, NYU Stern)
The leading authority on valuation sets up why value and price are different things. It is a little dense, so focus on the core message rather than every detail.
Two different numbers
- Market value is the price the market currently puts on a company. For a public stock it is just the share price, or the market cap for the whole company. It is a fact you can look up in a second, and it changes every moment the market is open.
- Intrinsic value is what the company is genuinely worth based on its fundamentals, above all the cash it can generate over its lifetime. It is not a quoted number. It is an estimate you build from analysis and assumptions.
These two numbers come from completely different processes. Market value comes from the collective mood and judgment of millions of participants, which can be rational, emotional, or somewhere in between. Intrinsic value comes from a disciplined effort to work out what the underlying business will actually deliver. Most of the time the two are close, but they are not the same thing, and the gap between them is what you act on.
Key terms
- Market value
- The price the market puts on a company right now, such as its share price or market cap.
- Intrinsic value
- An estimate of what a business is truly worth, based on the cash it can generate over its life.
- Undervalued
- When market price sits well below your estimate of intrinsic value.
- Overvalued
- When market price runs well above your estimate of intrinsic value.
| Market value | Intrinsic value | |
|---|---|---|
| What it is | The current price | An estimate of true worth |
| Where it comes from | The crowd's mood and judgment | Analysis of the business's cash flows |
| How you get it | Look it up instantly | Build it from assumptions |
| How often it changes | Every second the market is open | Only when the fundamentals change |
Mr. Market
Benjamin Graham, the father of value investing, captured this with a famous character. Picture the market as a moody business partner named Mr. Market who shows up every day and offers to buy your shares or sell you his, always at a price. Some days he is euphoric and quotes absurdly high prices. Other days he is gloomy and offers to sell cheaply. The key insight is that you are never obligated to trade with him. You can simply wait for the days when his price is far from your estimate of intrinsic value, and only then act.
Dealing with Mr. Market
You have carefully estimated a company is worth about 100 dollars per share. One morning Mr. Market, in a panic, offers to sell you shares at 65 dollars. What does Graham's lesson suggest you do?
You are never obligated to match Mr. Market's mood. A price of 65 against your 100 estimate is a chance to buy at a discount, not a signal to panic.Price is what you pay. Value is what you get. The investor's job is to know the difference and to act only when they diverge.
Why this is the foundation of everything ahead
If you can estimate intrinsic value and compare it to market value, you have a basis for every decision. When price sits well below your intrinsic estimate, the asset may be undervalued and worth buying. When price runs far above it, the asset may be overvalued and worth avoiding or selling. Every method in this unit, the discounted cash flow model, comparable companies, the dividend discount model, is simply a different tool for estimating that intrinsic value. They are all means to the same end.
Price versus value
Match each situation to what it suggests.
First steps on intrinsic value (Aswath Damodaran)
Goes one level deeper into what actually drives intrinsic value: cash flows, growth, and risk. These three ideas power the rest of the unit.
A note of humility
Intrinsic value is an estimate, never a precise figure handed down from above. It depends on assumptions about the future, and reasonable analysts can reach different conclusions from the same facts. This is not a weakness to hide but a reality to respect. The best practitioners think in ranges rather than single points, and they build in a cushion for being wrong, an idea we develop fully in the margin-of-safety lesson. Treat valuation as disciplined estimation, not false precision.
Why a range, not a number?
Explain in a couple of sentences why an honest analyst says a company is worth roughly 90 to 110 dollars per share rather than exactly 100.00 dollars. What is the range being honest about?
Write an answer before comparing it with the model response.
Model answer
Intrinsic value rests on assumptions about an uncertain future, such as growth, margins, and risk, and small changes in those assumptions move the answer. A range admits that uncertainty honestly, while a single exact figure pretends to a precision the analysis does not have. The range shows where the value likely sits without faking confidence the analyst does not actually have.
You now hold the core idea of the whole unit: price and value are different, and your job is to estimate value and compare it to price. Next we meet the most direct tool for estimating intrinsic value, the discounted cash flow model.