Calculating Intrinsic Value

By on June 6, 2009

Avner Mandelman, columnist at The Globe and Mail, explains how to arrive at an estimation of intrinsic value for an individual company and the market as a whole. Mandelman mentions that Warren Buffett utilizes a similar method to determine where to invest. Mandelman points out that estimating a reliable intrinsic value works best for companies whose earnings are fairly predictable over the long run.

Valuing a company basically boils down to getting a decent appraisal of its future earnings and then placing an accurate P/E on those earnings, adjusting for the company’s financial strength and competition from bond investments. Some companies will deserve a higher P/E than others. Knowing where interest rates are headed would also give an investor a big edge.


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