Intrinsic Value vs Market Value: Finding Good Investment Opportunities
In the world of investing, intrinsic value is a term that's often heard from experienced investors when they're asked about what asset to invest in.
Intrinsic value is usually the objective value or estimated true worth of an asset. This is calculated based on the P/E ratio and other financial metrics.
It's basically a way to assess the investment potential of an asset through using basic fundamental data rather than relying on its market value.
Market value is the current price of an asset as reflected by the market which is mostly based on supply and demand.
I sometimes see the market value of an asset as its extrinsic value. The market value can change often and rapidly. This doesn't happen with the intrinsic value as it has an 'element of solidity'.
Contrary to standard belief, I was interested more in market value than intrinsic value. But over time I did came to realise that both are important to understand.
They can be useful in assessing the worth of an asset from different viewpoints and identify potential opportunities or risks.
Some Factors To Consider
It's generally a bit complicated to calculate the intrinsic value an asset. Because there are different metrics used and these metrics can vary from one asset class to another.
Market value calculation is fairly simple as it is primarily dependent on two parts; the market price and supply and demand factor.
Let's say an asset has a market price of $100. And this said asset has 5,000 units of it available on the market. Calculatimg the market value of the asset will be:
Market Value = $100(price) x 5,000(units available)
Market Value = $500,000
The interaction between the buyers and the sellers mostly determines the market price of the asset. While the availability and desirability of the asset influences the supply and demand factor.
Clearly, this value will continue to change depending on the sentiment, expectations and speculation. But it is nontheless a good way to peek into the market value of an asset at any given time.
Difference In Value For The Same Asset
The interesting thing is that assets tend to have a variance gap between their market value and intrinsic value. With some assets, intrinsic value can be higher than the market value. With others, it is reverse.
Real estate is a good example of intrinsic value higher than market value. Generally, there's much intrinsic value on a real estate property. A high intrinsic value can come from the location, size, rental income, or growth potential of a property. But how often does the market value reflect these factors?
Unfavorable economic conditions, low demand or high supply can tank the market value of a real estate property giving market value investors the impression that the asset is unvaluable. But for the intrinsic value investor, the asset is undervalued and underpriced.
For market value higher than intrinsic value of an asset, cryptocurrency is a good example. Cryptocurrencies like meme coins have a low intrinsic value based on their utility, security and governance.
But because of high demand(thanks to genius marketing), speculation or optimism, the market value is propped way higher than the intrinsic value. While market value investors will be rejoicing at the potential good fortune, intrinsic value investors will be cautious of the overvalued asset.
Of course, this does not imply that market value investors are superficial or only think short term. This is just a way to view an asset from two different lens; market value and intrinsic value.
Overvalued Or Undervalued?
A great way to look whether an asset is overvalued or undervalued is through using the variance gap between intrinsic value and market value. Undervalued assets will always have a higher intrinsic value than market value. It's the opposite for overvalued assets.
There's this well known notion that the market price does not always reflect the true worth of an asset. Based on this notion, opportunities to buy low and sell high can be spotted from the discrepancy between intrinsic value and market value.
On the same breath, overvalued assets are to be avoided as they are usually not worth their current price and may eventually decline in the future. Undervalued assets however, can be purchased and hodl until their price reaches their intrinsic value or even higher.
Thanks for reading!! Share your thoughts below on the comments.
Seriously, a lot of market factors can influence a change in the mind of investors if the risk involved d is high.
Very true! When the risk is high enough, any change in market conditions can be a huge loss for investors. It depends on whether the risks was calculated or not. There are ways to mitigate risks when there's a change in market conditions. However, calming the mind to act rationally is not that easy.
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Sometimes, it's it's really difficult to know why an asset will be undervalued. However, I feel that people pay more attention to market value more than anything, because money is the popular Metric to judge an asset value. But truly, an asset might be intrinsically valuable and people just don't know it..
Exactly! Market value is the primary metric many investors use to determine the value of an asset. It's more exciting and understandable too. Undervalued assets are usually under the radar most of the time and those who are willing to look a bit deeper discover them.
I think intrinsic value is also a potentiality that hasn't been actualized yet. Sometimes, it is eventually reflected by the market, sometimes it is not. It's similar to the saying about the best person doesn't always win.
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Looking at both market and intrinsic value, it is necessary to implement both in our investment choices, we tend to mostly focus on the market value than the intrinsic value.
I'd like to think our exposure to cryptocurrency is helping us to subconsciously learn this things without being aware of it.
Yes, I think we're having a re-evaluation of both market value and intrinsic value investing concepts with crypto. Generally, crypto currently lacks intrinsic value but that might not be the case in the future when the digital world becomes more prominent. Market value on the other hand, will probably continue change like our emotions. Sometimes high, other times low.
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