The Definition

Intrinsic value is what a company might truly be worth based on its fundamental characteristics.

Why It Matters

The problem with market price: Current market price is heavily influenced by:

• Short-term trends
• Market speculation
• Emotional trading (fear and greed)
• Temporary events
• Sentiment and momentum

The solution—intrinsic value: Intrinsic value reveals the business's true worth based on:

• Cash flow generation
• Earnings potential
• Growth prospects
• Asset base
• Competitive advantages
• Long-term fundamentals

Making Objective Decisions

By understanding intrinsic value, you can determine if a company is:

Undervalued:

• Market price < Intrinsic value
• Buy opportunity
• Margin of safety present

Fairly valued:

• Market price ≈ Intrinsic value
• Hold or wait for better entry
• Limited margin of safety

Overvalued:

• Market price > Intrinsic value
• Avoid or sell
• No margin of safety

The Advantage

This approach allows you to: ✓ Ignore market hype and fear
✓ Focus on fundamental worth
✓ Make rational, data-driven decisions
✓ Have confidence in your analysis

What Is Margin of Safety?

Margin of safety is the buffer between intrinsic value and market price.

Formula:

Margin of Safety = (Intrinsic Value - Market Price) / Intrinsic Value × 100%

Why it's crucial: It protects you against:

• Errors in your analysis
• Unexpected changes in the business
• Economic downturns
• Shifts in growth rates
• Competitive pressures
• Management mistakes

Understanding Through Example

The 10,000-Pound Bridge

Imagine a bridge rated to hold 10,000 pounds. Would you drive a 9,800-pound truck across it?

No! Because:

• Does the bridge actually hold 10,000 pounds?
• Is the truck exactly 9,800 pounds?
• Are there structural weaknesses?
• Is there corrosion or damage?
• What about weather conditions?

Applying to Stocks

The same principle applies to investing:

Many factors affect stock performance:

• Economic conditions
• Competitive dynamics
• Management execution
• Industry disruptions
• Regulatory changes
• Market sentiment
• Growth rate accuracy
• Future earnings estimates

By demanding a wide margin of safety, you protect yourself from all these uncertainties.

Example: UnitedHealthcare Analysis

The data:

• Current market price: $291.71
• Intrinsic value: $450.28
• Undervalued by: 54.36%

Interpreting the Results

What this means: The stock is trading at approximately 55% of its calculated intrinsic value—a significant discount.

Translation: For every $1 of true value, you're only paying $0.55 in the market.

Minimum Threshold

20-30% undervaluation minimum

This is the baseline for considering an investment:

• 20% = Acceptable margin of safety
• 30% = Good margin of safety
• 40%+ = Excellent margin of safety

Ideal Target

30% or greater undervaluation

Why 30%+?

• Provides substantial cushion
• Protects against analysis errors
• Accounts for business uncertainty
• Allows for market inefficiencies
• Gives room for unexpected challenges

Example Scenarios

20% undervalued:

• Intrinsic value: $100
• Market price: $80
• Analysis: Acceptable, but limited margin

30% undervalued:

• Intrinsic value: $100
• Market price: $70
• Analysis: Good opportunity with solid protection

50% undervalued:

• Intrinsic value: $100
• Market price: $50
• Analysis: Excellent opportunity with huge margin of safety

The Benefits of Wide Margins

50% margin of safety (like UnitedHealthcare example):

Protection against:

• 50% error in intrinsic value calculation
• Significant business deterioration
• Economic recession impacts
• Competitive disruption
• Multiple years of poor performance

Allows you to:

• Be wrong and still profit
• Hold through volatility
• Have high conviction
• Sleep well at night

The Long-Term Approach

Core principle: By consistently investing with 20-30%+ margin of safety, you create a system for reliable long-term profits.

Why it works:

1. Built-in protection: Even if intrinsic value estimates are off, you're protected
2. Value realization: Markets eventually recognize true value
3. Mean reversion: Undervalued stocks tend to rise toward intrinsic value
4. Reduced downside: Margin of safety limits loss potential
5. Mathematical edge: Buying $1 for $0.50 has asymmetric returns

The Math of Margin of Safety

Example:

• Intrinsic value: $100
• Purchase price: $50 (50% margin of safety)
• Stock rises to intrinsic value: 100% gain

Even if you're wrong:

• Intrinsic value actually: $75 (you overestimated by 25%)
• Purchase price: $50
• Stock rises to true value: Still 50% gain!

Step 1: Check Current Price vs. Intrinsic Value

Navigate to the Intrinsic Value tab for any stock.

What you'll see:

• Current market price
• Calculated intrinsic value
• Percentage undervalued or overvalued

Step 2: Evaluate the Margin of Safety

Ask yourself:

• Is it at least 20% undervalued?
• Ideally, is it 30%+ undervalued?
• Do I have sufficient protection?

Step 3: Combine with Other Analysis

Intrinsic value is most powerful when combined with:

✓ Fundamentals: Is the business healthy?
✓ Valuation metrics: What's the P/E ratio?
✓ Insider trading: Are insiders buying?
✓ Institutional sentiment: Are big funds buying?
✓ Technical analysis: Are we near support levels?

Step 4: Make Your Decision

Decision matrix:

30%+ undervalued + Strong fundamentals = Buy signal

• High conviction
• Large margin of safety
• Strong risk/reward

20-29% undervalued + Decent fundamentals = Consider buying

• Moderate conviction
• Acceptable margin of safety
• Good risk/reward

< 20% undervalued = Wait

• Insufficient margin of safety
• Better opportunities elsewhere
• Risk/reward not compelling

Overvalued = Avoid or sell

• No margin of safety
• Poor risk/reward
• Better to be patient

The Value Investor Approach

Step-by-step process:

1. Screen for undervalued stocks

   • Look for 30%+ intrinsic value discount
   • Use MarketDash's intrinsic value tool

2. Verify fundamentals

   • Check financials (cash flow, margins, ROE)
   • Review SWOT analysis
   • Examine competitive position

3. Confirm with other signals

   • Insider buying?
   • Institutional accumulation?
   • Technical support levels?

4. Buy with conviction

   • Large margin of safety + solid fundamentals = high confidence
   • Position size accordingly

5. Hold patiently

   • Wait for market to recognize value
   • Continue monitoring fundamentals
   • Typically takes 1-3 years for value realization

Position Sizing Based on Margin of Safety

Higher margin = larger position:

• 50%+ undervalued: Up to full position size
• 40-50% undervalued: 75% of full position
• 30-40% undervalued: 50% of full position
• 20-30% undervalued: 25-50% of full position
• < 20% undervalued: Wait for better entry

Q: What if intrinsic value is wrong?

A: That's exactly why you demand a margin of safety!

If you have a 40% margin of safety:

• Your intrinsic value estimate can be 40% too high
• You'll still break even or profit
• This is the power of the margin of safety concept

Q: How often should I check intrinsic value?

A: Quarterly or when major events occur

Intrinsic value doesn't change daily like stock prices:

• Check after earnings reports
• Update after major company changes
• Review quarterly for material shifts
• Otherwise, focus on the margin of safety you bought with

Q: Can a stock get more undervalued?

A: Yes, and that's an opportunity

If stock drops further:

• Margin of safety increases
• Better buying opportunity
• Consider averaging down
• As long as fundamentals remain intact

Example:

• Bought at 30% undervalued
• Stock drops further, now 50% undervalued
• If fundamentals unchanged = even better opportunity

The Complete Framework

For highest-conviction investments, you want:

✓ Intrinsic value: 30%+ undervalued
✓ Fundamentals: Strong financials (FCF, ROE, margins)
✓ Valuation: P/E ratio 10-30, below 5-year median
✓ Insider trading: CEO/leadership buying
✓ Institutions: Super investors accumulating
✓ Technical: At or near strong support levels

This combination:

• Maximizes margin of safety
• Provides multiple confirmation signals
• Reduces risk significantly
• Increases probability of success

1. Intrinsic value = true worth—Based on fundamentals, not market emotion
2. Margin of safety is crucial—Protects against errors and uncertainty
3. 20-30% minimum undervaluation—The baseline for consideration
4. 30%+ is ideal—Provides substantial protection and upside
5. Higher margin = higher conviction—Size positions based on margin of safety
6. Combine with other metrics—Most powerful as part of complete analysis
7. Be patient—Value realization typically takes 1-3 years

• Don't chase overvalued stocks: No matter how popular, avoid stocks trading above intrinsic value
• The bigger the discount, the better: 50%+ undervaluation is exceptional
• Update intrinsic value regularly: After earnings and major company changes
• Use it as a filter: Screen for 30%+ undervalued stocks first, then analyze
• Margin of safety allows you to be wrong: That's the whole point—protection
• Value realization takes time: Don't expect immediate results, be patient
• Combine with fundamentals: Cheap for a reason vs. cheap with quality = big difference

Remember: Intrinsic value combined with margin of safety is the foundation of value investing. By consistently buying stocks at 30%+ below their intrinsic value, you create a system that protects your capital, limits downside risk, and sets you up for consistent long-term profitability. This disciplined approach allows you to invest with confidence, ignore market noise, and let value realization work in your favor over time.