Case study 1
(a) What is the intrinsic value?
A: The intrinsic value is a way to estimate the real value of a company or a capital, according to the present value of its future cash flow. Why is the intrinsic value so important?
A: Intrinsic value is all important and is the only logical way to evaluate the relative attractiveness of investments and businesses. It shows investors the growth ability and profitability of the company or capital, which focus on its future trends. How to estimate the intrinsic value?
A: the intrinsic value is not a precise figure, which is estimated under various situations. Thus, under the fixed interest rates and forecast of future cash flows, the intrinsic value of a company or a capital can be estimated that the future value created during its remaining life divides the discount rate for those years. What are the alternatives to intrinsic value?
A: the intrinsic value aims to estimate the real value of a business. Therefore, the alternatives can be the book value, market value, fair value, etc. Why does Buffett reject them?
A: As we all know, Buffett does not try to “time the market” —his is a strategy of patient, long-term investing. He is used to invest a product in long run. Meanwhile, the intrinsic value focuses on the future profitability, and then discounts it to the current cash value. That meets Buffett’s investment philosophy.
(b) Identify points where you agree and disagree with Buffett. A: Agree,
The philosophy— Investing behavior should be driven by information, analysis, and self-discipline, not be emotion or “hunch”. Investment is a rational activity and the decisions should be made after analyzing all of the gained information. The impulse in investing behavior may make profit once or twice, but it will lose in the long term. That is the reason why the benefit of retail investors is easily to be damaged in stock market. However, there is a same situation to the professional investor. As Benjamin Graham...
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