Intrinsic Value: What Investors Know (That You Should Too)
What is intrinsic value & why mastering it should be your #1 focus as a poultry entrepreneur...
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And now, for the main event…
“How much is a business actually worth?”
Now, that’s NOT the same as…
“How much do I want it to be worth?
Or
“How much do I think it ‘could’ be worth?”
But rather:
“How much is it ACTUALLY worth?”
This, in my opinion, is the #1 question that should be on the minds of any entrepreneur.
(Present company included, naturally.)
And without a quantifiable answser to this question, you really don’t know how much you should be willing to invest.
Whether that be money, resources, time or effort.
Underestimate it - and you could have put more in and gotten more out.
Overestimate it - and you could have put the wasted investment into another project better suited for returns.
And so it is critical that as a poultry entrepreneur you know EXACTLY how much your business idea/project is actually worth.
Because if you don’t, how else can you persuade a more financially astute 3rd party to trust your judgment?
Speaking of the financially astute…
Here is Warren Buffet, Chairman of Berkshire Hathaway (…and arguably one of the most successful investors of our modern age, with a personal net worth of £160.2 billion) - giving us his definition of intrinsic value and its importance:
To summarise and to digest:
Intrinsic value =
“the present value of all cash that will be ever distributed by that business.”
In other words:
The value of future cash flow according to the value of today’s money.
That is an investor’s #1 problem to solve.
As Warren said, investing is all about:
“Put money in and get money out.”
A simplification, but the gist.
Another consideration could be:
“What are interest rates?”
This is relevant to factor in as a cost of borrowing, should the investor be leveraging his capital.
Then there’s the investor’s general leaning toward either the deal numbers or deal influences (otherwise known as):
Qualitative factors (“how sure can we be that this idea will work out as planned?”).
Quantitative factors (“do the current numbers and projected numbers correlate & stack up?”).
Warren also mentions, ‘discount rates’, as a factor within his intrinsic value assessment.
Discount rates are the rates or percentages that an investor will discount or reduce the value of future cashflows by, to take into account (or factor in) the ‘opportunity cost’ of a common alternative, like saving the money instead.
In other words, his estimation of the value of future cashflow from a business interest is always ‘less’ or ‘minus’ the value of interest that he might have been enjoyed from simply putting the cash in a savings account.
A prudent measure.
And now some other points to note from Warren’s discourse (which gives us valuable insight into his investment philosophy):
Competitors: with every investment opportunity there is competition…
In the case of Berkshire Hathaway and Warren Buffet competitors to his investment opportunities is Private Equity (PE) - in other words, companies that specialise in raising funds to make acquisition moves in business investing.
Whilst PE competes with Berkshire to buy stakes in similar target businesses, the funding of PE actually couldn’t be further from Warren and his philosophy. Private equity typically uses financial leverage, or debt to acquire. Whereas, Berkshire Hathaway is naturally a cash-rich business that holds cas-generative, high-return businesses.
So the net result for Warren’s firm is a significant ‘moat’ of financial capital available to deploy at any given time. No need to borrow.
In fact, if Berkshire doesn’t successfully lend the cash, their future net worth decreases in line with inflation (i.e. decreasing spending power of today’s money, against tomorrow’s raised prices.)
Net cash rich position: Warren states that Berkshire “…has no business that naturally employs all the capital that flows [to them]…”, so in his words their success as a firm “…depends on opportunities available and ingenuity used to employ that cash.”
Unless they find ‘good bets’ to invest their cash in, their cash literally devalues whilst they hold it. In other words, Berkshire Hathaway makes its money from future cash flows - rather than simply holding cash.
Without a business venture to turn their stagnant cash into a profitable flow, Berkshire has no business at all.
Target investment opportunities: Warren confessed that his holdings company seeks to “…buy good businesses from people who care about where their business go…” -
Berkshire don’t bet on trendy opportunities, nor do they get swayed by the performance of a stock.
They bet on rooted internal business fundamentals like profitability and good management with sound motives. They are not in the market for quick gains, but rather steady, long-term returns.
“Don’t be too quick to sell the stock” - Warren’s (late) business partner, Charlie Munger admonishes the younger investors in the crowd.
Over their decades of accumulating many generations’ worth of financial wealth, both Warren and Charlie have mastered the art of ‘value investing’.
Value investing is where an investor assesses a business investment’s intrinsic value according to its ability to return future profitable cash flows, and not what the trending market price is.
Warren and Charlie therefore invest to gain the cashflow of the business, rather than to make a margin on the differnce between buy price and sell price of the stock.
“Why aren’t there more copycats? It looks just too hard to do…plus it’s very slow…” Warren’s firm sees its investments as actually owning the businesses they take a stake in.
As such their only concern is if the business is going to offer a good return on capital.
And as with any business, especially in the industries that Berkshire is interested in, you can’t rush the trading cycle (e.g manufacturing and railroads have their steady cyclical patterns and there’s no rushing them). In other words, Berkshire makes money with patience. (Which is at complete odds with the casino-like nature of our modern markets and most modern investors.)
Naturally, this leaves Berkshire in a lane all to themselves, cherry-picking the best ‘slo-grow’ deals, simply because everyone else is just too impatient to wait for the returns.
And low competion often-times means low price for what Warren’s buying. Leading to decent margin of returns on top of capital employed.
“Nothing in American business schools that teaches people to be like Berkshire”: this is an observation by both Warren and Charlie during this video clip.
They remark on the fact that not only does their firm have a distinct advantage in today’s more reactive investment marketplace. But also, there little chance of their business being exclipsed by a start-up.
Why? Because it’s just not what people are being taught in business school.
And so, the art of value investing (by estimation of an opportunity’s intrinsic value), not only works terrifically well for Warren…
…but it’s also very much a lane with only him driving in it.
Albeit, the slow lane…
But with zero competitive traffic - guess which tortoise is going to win that race (and is winning it to the tune of over $160Billion in personal wealth)?
Now over to you…
Is the idea of intrinsic value new to you?
Are you familiar with calculating future cash flows of a poultry business?
Are you uncertain of how to approach estimating future cashflow?
I’d be interested to hear from you.
(I read every comment)
Speak soon,
Temi
P.S. If you want to build a bankable poultry investment plan — there’s a better way.
I have a 1-to-1 coaching service which is exactly that.
It’s like having me partner with you on your project - with all my pro-tools.
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