Lesson 1 of 7 · 11 min
Intrinsic value, mispricing and the three model families
Valuation means estimating what a share is worth from its fundamentals and comparing that estimate with the market price, using one or more of three model families.
In short
- Intrinsic (fundamental) value comes from analysing the business; the market price is what the share trades at today.
- Value > price → undervalued; value = price → fairly valued; value < price → overvalued.
- Act only when the gap is large relative to your confidence in the model and inputs, and when you expect the price to converge to value.
- Three model families: present value (discounted cash flow), multiplier (price or EV multiples) and asset-based (assets minus liabilities).
- Analysts often use several models and a range of inputs; the choice depends on the data available and confidence in it.
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