Have You Ever Pressed a Ball Under Water? (Insights On Intrinsic Value And Time)
Have you ever pressed a ball under water? What this has to do with investing? Read on...
Worlds best investors, like Warren Buffett, have a habit of buying companies when they are trading well below their intrinsic values. And this has a lot of similiarities with a ball under water...
Let's compare the intrinsic value of a share with the surface of the water. A ball under water has a strong urge to resurface. And how deeper it is under water, the higher the pressure...
It's the same with stocks: the higher the undervaluation, the higher the expected return!!!
But how can we be so sure that the share will reach it's intrinsic value? Well this is practically a law of nature, as if it were gravity. When you buy shares below their intrinsic value you can be 100% sure that that value will come out sooner or later. (Ofcourse your value estimate should be reasonable)
Possibly that other investors will see that 'your' share is undervalued and start buying shares of their own, thus driving up the price towards it's true value. Or an other company could see the undervaluation and can take over the entire company. Or maybe there's a private-equity firm who is interested in taking over the business. As you can see; there are a lot of different ways your share can meet up with it's intrinsic value.
Sometimes the share price of an undervalued company will rise soon after you purchased the shares, but most of the time the undervaluation will remain for some time. But you can draw comfort out of the fact that the 'value-gap' will eventually be closed, one way or another!
It is ofcourse important to keep your intrinsic value estimate reasonable. There are 2 kinds of companies: Those of which you can estimate the company's intrinsic value with a reasonable degree of certainty...and you got companies where you can not! The nice thing about this: you can simply ignore the second kind of businesses!
The companies who remain will be companies of which you can determine their intrinsic value with a reasonable degree of certainty. Still it will always be an estimate. When you've calculated the company's intrinsic value, you can compare it with the current share price.
If the share is trading above or around it's intrinsic value, you don't have to take action. But is the share trading at a big discount to it's intrinsic value, then Mr. Market is offering you a nice buying opportunity! And that particular strategy hasn't worked out bad for people like Warren Buffett!
And to get back at 'the-bal-under-water'-thing. Our comparison of stocks and the ball isn't entirely correct...
Investors like Warren Buffett only buy good companies, or businesses who are constantly creating value. And that's why their intrinsic value is also rising.
So we aren't looking for regular balls, but we are looking for balls under water where there is constantly air being pumped into...that's the rising of the intrinsic value.
And you can understand: the pressure to resurface increased with every day that passes!!!
Please check out some of my other blogs as well and leave a comment if you like!
Disclaimer: I am not responsible for any losses of money or the like because of the usage of the above mentioned methods and tips. You hold full responsibility over your own actions.