Intrinsic Value

How much should you pay for a business? Every day the stock market offers prices for thousands of businesses, but how do you know if the price for any particular business is too low or too high? To succeed as an investor, you must be able to estimate a business's true worth, or "intrinsic value," which may be entirely separate from its stock market price.

Look at the financial statements

For Benjamin Graham, a business's intrinsic value could be estimated from its financial statements, namely the balance sheet and income statement. For example, in 1926 Graham discovered that Northern Pipe Line, an oil transport company, owned a collection of railroad bonds that were worth $95 for each of its shares. However, Northern's stock was selling for only $65 per share. It does not take a genius of Graham's caliber to see from Northern's balance sheet that its intrinsic value was at least $95 per share since the company also owned valuable pipeline assets. Although it took a proxy fight, Graham eventually brought Northern's management to his way of thinking: Northern sold the bonds and paid a $70 per share dividend.