Stock -The Theory of an Expanding Intrinsic Value
Buffettology
(The Theory of an Expanding Intrinsic Value)
Introduction :- Mary Buffet and David Clark in Chapter thirteen of their book titled
"Buffettology: The Previously Unexplained Techniques That Have Made Warren Buffett the World's Most Famous Investor" have explained the theory of an expanding intrinsic value.
Intrinsic Value :- Intrinsic value is a fundamental concept in finance and investing, representing the true, inherent worth of an asset based on its underlying characteristics, without reference to its market price. This concept is essential for investors seeking to determine whether a
stock, bond, or other security is overvalued, undervalued, or fairly priced.The intrinsic value of equity is the perceived true worth of a stock based on fundamental analysis, including the company's financial health, growth prospects, and competitive position. This is different from the market value,
which is the price at which the stock trades on the market.
Theory of an Expanding Intrinsic Value :- The theory of expanding intrinsic value
of an equity focuses on the concept that the true worth of a company's stock can grow over time due
to various internal and external factors.Several factors can contribute to the expansion of a company's
intrinsic value over time which may include revenue growth, profit margins, market expansion,
competitive advantages etc. A company that consistently grows its earnings through increasing sales or improving efficiency will see its intrinsic value expand. This is often measured through metrics like earnings per share (EPS) growth
Philip Fisher and Charlie Munger realized that certain companies with particular economics a sort of expanding value. They also said if the profitability of the company kept improving,eventually the price of the stock would rise to reflect the improved economics of the business.
Graham believed that in short term the market is a voting machine, letting whim, fear, and greed dictate how it votes. But in long term, the market is a weighing machine that values a company
according to the weight of its intrinsic value.
Warren realized that that the Grahamian approach to investing-purchasing anything and every-thing that was defined as a bargain was not the ideal strategy. He found that if he could buy an excellent business, the business, in effect, would have an expanding value as opposed to the mediocre business's static value. Further, if the business continued to grow, it made more sense to hold the investment indefinitely than to get out of the business. This in turn would enable to put off the capital gains to some far-off date and enjoy the fruits of compounding.
If we take examples from Indian industries the intrinsic value of companies like Pidilite Industries, ICICI Bank, KEI Industries, and Bajaj Finance etc. kept on expanding and the share prices
followed to catch up.
Conclusion
The theory of expanding intrinsic value of an equity underscores the importance of fundamental growth drivers such as revenue growth, profit margins, innovation, and strategic investments. By Focusing on these factors, companies can enhance their intrinsic value over time, potentially leading to higher stock prices and better returns for investors. Understanding and analyzing these elements are crucial for investors seeking to identify undervalued stocks with strong growth potential