How to View Intrinsic Value vs Market Value When Investing

Intrinsic Value vs Market Value is really what it all comes down to for those who actively pick stocks, well sorta. Again, the process of equity valuation is not written in stone but active investors are always trying to select those stocks currently trading at a discount and will most likely outperform an index like the S&P 500 over the long run. This means the market is not taking into consideration the intrinsic value of the company(common stock). The good news is that over the long-term markets will usually correct this so those who bought low and were patient are typically rewarded. Famous investors such as Warren Buffet and Peter Lynch have quite the track record of picking stocks the market is overlooking.

Sometimes It is Best to Start By Looking at What is Beaten Down a Bit 

How do great investors like Lynch and Buffet do this? Sometimes it is more about trying to Be in the Right Sector of the economy whether it be through an ETF or a few stocks you have researched. For example, maybe the housing market takes a tumble and the stock price(market value) of a few companies correlated to the housing market comes falling down with it. 

Most people panic and sell,sell,sell but this could be a ripe buying opportunity at a certain point during the market correction. Let us be real here, the housing market will most likely recover and it might not be a bad idea to allocate some of your portfolio into companies who are directly impacted by the housing market. Before you know it, three years have passed and earnings have started to grow during this time period. You know what else has probably occurred? Yup, the stock price has also corrected itself and WOW will you be happy you decided to be patient and invest with a long-term strategy. Who did not like going to the Home Depot with their parents as a child at times? If not a few stocks then aim for an ETF with the best companies who will benefit during a recovery.   

GenVest Take

Now do keep in mind, some sectors of the economy or maybe even individual stocks of companies are beaten down for good reason. How so? This is because Business Outlook=Equity Growth! In some instances a particular sector or company really might have a poor outlook in terms of their current business model or industry going obsolete if they do not show innovation to stay ahead. Think about movie theaters, Blockbuster or the darn typewriter. Make sure a company or industry is not subject to creative destruction.

One thing we will add on here though is that sometimes buying a stock that has been on a solid run can still be justified. Think Apple, Microsoft, Nike and even Google!(These are subject to change!) Sure they might be trading at a slight premium but these are some impressive companies in terms of growth prospects, leadership, and their financials are pretty darn sound also when you dive into them. If a correction occurs bringing down the market value(stock price) of some quality companies and the long-term outlook is unchanged, use it as an opportunity to buy since the intrinsic value will remain the same. Think about it like this, Intrinsic Value is what you think a company is truly worth over the long-term.