How do legendary investors like Warren Buffett determine what a company is really worth, separate from its daily market price? They focus on its intrinsic value. This episode is a deep dive into this cornerstone of value investing and answers the fundamental question:

How do I calculate intrinsic value of a stock?

We provide a clear, step-by-step guide to the most common method used by professionals: the Discounted Cash Flow (DCF) model. Learn what intrinsic value is, how to project a company's future cash flows, and how to discount them back to today's dollars. We'll walk through a concrete 8-step example and expose how sensitive the final number is to your assumptions. Most importantly, we'll cover the crucial concept of demanding a "margin of safety."

This is your shortcut to thinking like a long-term investor and learning to distinguish between a stock's price and its true value. Subscribe for more deep dives into the tools of smart investing.

Key Takeaways

• It's the Present Value of All Future Cash Flows: Intrinsic value is an estimate of a company's true worth, calculated by projecting all the cash it will generate in the future and then discounting that cash back to what it's worth today. It's an anchor of value that is separate from the daily market sentiment.
• The Discounted Cash Flow (DCF) Model is the Gold Standard: This is the most widely used method for calculating intrinsic value. It involves projecting a company's Free Cash Flow (FCF) for a set period, calculating a "terminal value" for all cash flows beyond that, and discounting everything back to the present using a chosen discount rate.
• Your Assumptions Are Everything (Be Conservative): The DCF model is highly sensitive to the inputs you choose, especially the future growth rate and the discount rate. A small tweak in these assumptions can dramatically change the final intrinsic value. The key is to be realistic and conservative.
• Always Demand a "Margin of Safety": This is a cornerstone of value investing. Because your calculation is only an estimate, you must protect yourself from errors and bad luck. This means only buying a stock when its market price is significantly below your calculated intrinsic value, creating a protective cushion.
• Focus on Free Cash Flow, Not Just Net Income: When performing a DCF, it's crucial to use Free Cash Flow (FCF), which is the actual cash a business generates. Net income is an accounting figure that can be influenced by non-cash charges and is less representative of a company's true economic profit.

"This intrinsic value number, it's not printed anywhere... You don't find it on Yahoo Finance. You got to figure it out yourself. You have to roll up your sleeves and actually calculate it."

Timestamped Summary

• (02:36) The Discounted Cash Flow (DCF) Model Explained: A clear breakdown of the gold standard formula for calculating intrinsic value and what each variable—FCF, discount rate, and 'n'—represents.
• (03:47) A Step-by-Step DCF Calculation: A concrete, 8-step walkthrough of a DCF model for a hypothetical company, from projecting cash flows to calculating the final intrinsic value per share.
• (09:11) The Art of Assumptions: An essential discussion on how sensitive the DCF calculation is to your chosen growth and discount rates, and why being conservative is key.
• (11:38) The "Margin of Safety": Your Most Important Buffer: Learn the crucial value investing principle of only buying a stock when its price is significantly below your calculated intrinsic value to protect yourself from errors.
• (13:52) The Biggest Mistakes to Avoid: A review of the common pitfalls in intrin

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