Intrinsic Value vs Market Price: What Every Investor Must Know

Benjamin Graham introduced one of the most powerful metaphors in investing: imagine you have a business partner named Mr. Market. Every day he shows up at your door offering to buy your share of the business or sell you his — at a price that changes based entirely on his mood. Some days he is euphoric and offers an absurdly high price. Other days he is depressed and practically gives his shares away.

The key insight is this: Mr. Market is there to serve you, not to guide you. His daily price quotes tell you nothing about the actual value of the business. Yet most investors treat Mr. Market as an authority — buying when he is excited and selling when he is panicked. This is exactly backwards.

Intrinsic value is what a business is actually worth based on its ability to generate cash over its remaining life. Market price is what someone will pay for it right now. These two numbers can diverge dramatically for months or even years.

How to estimate intrinsic value. There is no single correct method, but three approaches give you useful triangulation. First, a discounted cash flow analysis — project conservative free cash flows for ten years, add a terminal value, and discount back at an appropriate rate. Second, an asset-based approach — what would a rational private buyer pay for these assets, net of all liabilities? Third, a comparable transactions approach — what have similar businesses sold for in acquisitions?

You do not need precision. Seth Klarman emphasizes that valuation is about being approximately right rather than precisely wrong. If all three methods suggest a stock is worth between 70 and 90 dollars, and it trades at 50, you have a meaningful margin of safety. If your estimates range from 40 to 120, you do not have enough conviction to act.

Why prices diverge from value. Short-term sentiment drives most price movements. Institutional fund flows, index rebalancing, earnings surprises, and social media momentum all push prices away from underlying value. Howard Marks describes this as the pendulum of investor psychology — it spends very little time at the center and most of its time swinging toward extremes of fear and greed.

Common mistakes. First, treating the market price as the truth. If a stock drops from 100 to 60 and nothing has changed about the business, the stock has become cheaper — not worse. Many investors psychologically cannot separate price movement from business performance. Second, trying to calculate intrinsic value down to the penny. False precision creates false confidence. A range is more honest and more useful than a single number.

Your next step: pick one company you own and estimate its intrinsic value using at least two methods. Then compare your estimate to the current market price. If you struggle with the process, KeepRule's scenario pages address real dilemmas like "Is this stock undervalued or a value trap?" using frameworks from Graham, Buffett, and Klarman — giving you a structured way to think through the question rather than guessing.

The market quotes prices. Your job is to know values.

This content is for educational purposes and does not constitute personalized investment advice.