How to Calculate the Intrinsic Value of Stocks Like Warren Buffett

One of the most sought after calculations in all of investing is Warren Buffett’s intrinsic value formula. Although it may seem elusive to most, for anyone that’s studied Buffett’s Columbia Business Professor, Benjamin Graham, the calculation becomes more obvious. Remember the intrinsic value formula that Buffett uses is an embellishment of Graham’s ideas and fundamentals.

One of the most amazing things about Benjamin Graham is that he actually felt bonds where safer and more probable of an investments than stocks. Buffett would strongly disagree with that today due to high inflation rates (a whole different topic), but this is important to understand in order to understanding Buffett’s method for valuing equities (stocks).

When we look at Buffett’s definition of intrinsic value, we know he’s quoted as saying that the intrinsic value is simply the discounted value of the future cash flows of a company. So what the heck does that mean?

Well, before we can understand that definition, we must first understand how a bond is valued. When a bond is issued, it is placed on the market at a par value (or face value). In most cases this par value is $1,000. Once that bond is on the market, the issuer then pays a semi annual (in most cases) coupon to the bond holder. These coupon payments are based on a rate that was established when the bond was initially issued. For example, if the coupon rate was 5%, then a bond holder would receive two annual coupon payments … Read more