Once you accept the concept of intrinsic value as a method of determining what a company is worth, apply it to the field.
You have to buy stocks selling for less than intrinsic value. If a company is worth X, you want to invest in it at less than X.
Like a banker, you look for the margin of safety, the ” collateral”. If you are wrong, or if some unforseen event reduces your estimates of a company’s value, you want a cushion.
If you buy shares in a company for less than they are worth to a knowledgeable buyer of the entire company, you have a margin of safety. As Warren Buffett advised, the first rule of investing is don’t lose money and second rule is don’t forget rule number one.
Most companies increase their net worth, or intrinsic value, over time. If intrinsic value is your benchmar’, you can mrofit in two ways. The first is the value of the shares you own will increase whild you own them. Second, if the price of the stock rises from less than intrinsic value to intrinsic value over time, you will have a win/win situation.
Because if you pay full price for a stock, your gains are limited to the company’s growth and dividends it may pay you.
If you buy a stock for $10,00 and we believe it is worth $15,00, we have a potential gain of $5,00. If during the period we own the stock, the company can grow its business 10 percent so that the stock becomes worth $16,50, we have larger potential gain. However, the greatest part of that gain has come from buying the stock cheaply in the first place.
If you had bought the same stock for $15,00 your potential gain might only be $1,50.