What sets each
Market price = supply, demand, sentiment, news - volatile and emotional. Intrinsic value = discounted future cash flows - slow and fundamentals-driven.
Comparison
Intrinsic value vs market price
Intrinsic value is what a business is actually worth based on the cash it will generate over time; market price is what it currently trades at. The two are frequently different - and that gap is the entire opportunity in value investing. Price is set by the market's mood day to day; intrinsic value changes slowly, with the business's fundamentals.
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Short answer
"Price is what you pay; value is what you get." When market price sits well below your intrinsic-value estimate, that discount is your margin of safety. When price runs far above value, the market is pricing optimism the business may not deliver.
The key differences
The gap is the edge
Buy when price is below value (a margin of safety). The market tends to re-rate toward value over time - though 'over time' can mean years.
Mr. Market
Graham's metaphor: a manic-depressive partner who quotes wildly different prices each day. You're free to ignore him or exploit him.
How to use it
Estimate intrinsic value (a DCF), compare to price, demand a margin of safety. Never confuse a falling price with falling value.
Price moves; value usually doesn't
A stable, profitable business might be worth $100 a share on a sober discounted-cash-flow estimate. Over a single year the market could quote it anywhere from $70 (recession fear) to $130 (euphoria) - while the underlying business, and its intrinsic value, barely changed.
The value investor's job is to estimate the $100, then act only when Mr. Market offers a meaningful discount to it. Buying at $70 builds in a 30 percent margin of safety; the gap, not the daily price, is where the return comes from.
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Related
- What is intrinsic value? - what a business is really worth, defined.
- What is margin of safety? - the discount of price to value that protects you.
- How to calculate intrinsic value - the DCF that produces the value estimate.
- What is DCF valuation? - the model behind the intrinsic-value number.
See the discount to fair value
invest-like grades valuation against the ten-year Treasury and peer multiples on every stock - a fast read on whether price sits below value.
Educational only. invest-like is not a registered investment adviser; nothing here is personalised investment advice. Always do your own research and consider your individual circumstances.