This week I’ll be delving into the topic that is most associated with Warren Buffett: intrinsic value. Buffett is famous for investing in stocks based on the company’s intrinsic value, instead of the company’s current trading price.
What is Intrinsic Value?
Intrinsic value is the discounted value of the cash flow generated by a business into perpetuity. This value can be different than the stock’s trading price due to the temperament of short-term traders. As long-term owners of businesses, we at Volaris consider intrinsic value to be a more accurate representation of a company’s true worth.
Why Use That Figure?
Intrinsic value calculations look at all aspects of the business – both tangible and intangible. But as to why Buffett relies on this figure, the reasons are twofold.
Firstly, due to the volatility of the stock market, Warren feels that the market is short-term oriented and more or less a popularity contest. Therefore, stock prices may be grossly inaccurate.
Secondly, and more importantly, Buffett chooses stocks based on the overall potential of the company. He doesn’t look at the short term gains that a company can bring him. Instead, he’s focused on the long term and having ownership in strong businesses that are capable of generating recurring earnings.
Tying it All Together
That mentality is the same one that we have here at Volaris. We don’t buy companies just to turn them around in order to make a quick profit; we hold onto our companies for life.
This is for one simple reason: continual success takes time and requires long-term thinking.
Our goal for all companies in Volaris is that they are the dominant player and leader in their respective markets and you can’t do that by having a short term focus.
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