IV... and your estimation

[JBird]

Rimm's "intrinsic value" is likely dropping....why would you buy more? People seem to assume that IV is fixed and certain while price is variable....but IV seems to be pretty variable when it comes to these tech stocks...

 

I disagree.  IV doesn't change.  Your perception of IV changes along the turbulent path of discovery.  You keep trying to predict the unpredictable, and blame it on the IV of the business rapidly changing.  No.

 

 

But isn't the concept of intrinsic value a "perception"? It is always an estimate, not a quantifiable, or verifiable property like say mass.

 

There is only one intrinsic value.  Time will reveal it to us.

 

We have only prediction to rely on divining it's value.

 

I disagreed with Eric when he wrote that. But I'm the fool; he is right and I was wrong.

 

If you were all knowing about the future economics of a business you could discount its earnings from the apocalypse back to today using the appropriate interest rate. That's the IV and that eventuality doesn't change.

 

Despite the fact that time only reveals one outcome for intrinsic value, we know there are a huge range of theoretical outcomes. So we're forced to make educated estimates, and update those estimates as circumstances change.

 

I doubt this is a useful thread, but what the hell.

[merkhet]

For me, IV is a bit like Schrodinger's Cat.

[Guest wellmont]

I remember back in the early 1990s I read a report written by James Gipson, a very good investor and writer. He was doing a post mortem on his investments in savings and loans companies. These were way under book and on the surface, very cheap. He admitted though, that the intrinsic value declined. He said the stocks went down but the IV of the businesses went down more. So he decided to sell them and take his lumps.

 

Whenever you hear an analyst say that this decision by Management "destroyed value", by extension they mean that the IV of the business got marked down. Lots of businesses, once healthy, fail and go into bankruptcy. The IV of the business obviously changed. Their ability to produce free cash flow has declined or permanently impaired.

[twacowfca]

For me, IV is a bit like Schrodinger's Cat.

 

Or the Cheshire Cat's disappearance until only the smile remained.  ;D

 

Schrodinger's Cat would be more like mark to model derivatives: "good until reached for".    ;D

[Kiltacular]

Despite the fact that time only reveals one outcome for intrinsic value, we know there are a huge range of possible outcomes. So we're forced to make educated estimates, and update those estimates as circumstances change.

 

 

I would say: "we know there is only ONE possible outcome but since we don't know what it is, we are forced to make educated guesses."

 

 

[JBird]

Their ability to produce free cash flow has declined or permanently impaired.

 

My contention is that this fact does not change what intrinsic value was when the company opened its doors.

 

Consider a 50 year bond issued today. It's supposed to pay semi-annual coupons every year. Imagine you have oracular vision that has enabled you to see the timing of the bond's cash flows, as well as interest rate changes over the next 50 years. Your foresight reveals that after Year 20 all the coupons payments stop, and then restart at Year 30. But what do you care? To value it you simply discount the cash flows at the appropriate interest rates, and you have a net present value figure representing the value of the bond. Satisfied, you buy the bond at your NPV figure.

 

When Year 20 comes around are you going to say the value of your bond decreased? You paid nothing for Year 20-29 because there was no value to pay for. And at Year 30 did it increase?

 

An inefficient market would change the price of the bond at Year 20 and 30 but what's the difference? At Year 50 your investment finishes paying you what it was worth.

[jay21]

Rimm's "intrinsic value" is likely dropping....why would you buy more? People seem to assume that IV is fixed and certain while price is variable....but IV seems to be pretty variable when it comes to these tech stocks...

 

I disagree.  IV doesn't change.  Your perception of IV changes along the turbulent path of discovery.  You keep trying to predict the unpredictable, and blame it on the IV of the business rapidly changing.  No.

 

 

But isn't the concept of intrinsic value a "perception"? It is always an estimate, not a quantifiable, or verifiable property like say mass.

 

There is only one intrinsic value.  Time will reveal it to us.

 

We have only prediction to rely on divining it's value.

 

I disagreed with Eric when he wrote that. But I'm the fool; he is right and I was wrong.

 

If you were all knowing about the future economics of a business you could discount its earnings from the apocalypse back to today using the appropriate interest rate. That's the IV and that eventuality doesn't change.

 

Despite the fact that time only reveals one outcome for intrinsic value, we know there are a huge range of theoretical outcomes. So we're forced to make educated estimates, and update those estimates as circumstances change.

 

I doubt this is a useful thread, but what the hell.

 

Only if you are a stout determinist could this possibly be true.  I.e.  If it is possible that the future only has one potential outcome and that outcome is knowable, then there could only be one IV.  Since the second condition is undoubtedly false, it is much better to assume a range of IVs. 

 

Additionally, even if you knew the CFs the company will generate, you still could make the argument that there are multiple IVs based upon different discount rates. 

[mikazo]

I think a more accurate description of a single intrinsic value would be the following: There is only one intrinsic value for a single point in time. Think of the following example:

 

You build a factory and it becomes more and more efficient each year, thus its intrinsic value is growing each year. After 100 years, there is an accident at the factory and it explodes into smithereens, rendering it completely and utterly useless. At time = 100 years, its intrinsic value is zero. Does that mean it wasn't worth building in the first place? Or do you do a discounted cash flow analysis? Do you include year 100, where cash flow is zero? Or do you ignore year 100 and do your analysis up to year 99? Whether you include year 100 or not, you get a different intrinsic value.

 

So it all depends on your end point in time, even if you have perfect knowledge of interest rates and cash flows. You get a different answer, depending on if you sell the business at year 99 for lots of money and thus realizing your return on investment, or you sell at year 100 for 100% loss.

[Palantir]

I think IV is just a mental shortcut for saying, "I think everyone else is willing to pay X for this if they truly realized its worth", which makes it an estimate and intrinsically subject to guesswork and opinions. IMHO that makes it too complicated for me so I just skip over the notion of IV, and say, If I own the firm and pay $X, what is my cash flow return? If it is above 10% given conservative assumptions it is a good potential investment.

 

I think IV is great if you're looking at a firm as a collection of assets and you want to buy it at a discount, but for an operating company, I think there is a lot more handwaving involved.

[boilermaker75]

I think a more accurate description of a single intrinsic value would be the following: There is only one intrinsic value for a single point in time. Think of the following example:

 

You build a factory and it becomes more and more efficient each year, thus its intrinsic value is growing each year. After 100 years, there is an accident at the factory and it explodes into smithereens, rendering it completely and utterly useless. At time = 100 years, its intrinsic value is zero. Does that mean it wasn't worth building in the first place? Or do you do a discounted cash flow analysis? Do you include year 100, where cash flow is zero? Or do you ignore year 100 and do your analysis up to year 99? Whether you include year 100 or not, you get a different intrinsic value.

 

So it all depends on your end point in time, even if you have perfect knowledge of interest rates and cash flows. You get a different answer, depending on if you sell the business at year 99 for lots of money and thus realizing your return on investment, or you sell at year 100 for 100% loss.

 

Exactly. Plus every year there is some probability the plant will blow up. Maybe a 1% chance that it blows up in year 10. So if you could restart at the initial point in time 100 times one of those time-lines the IV would be zero in year 10 and 99 time-lines it would not. Saying there is one IV is equivalent to saying your whole life is predestined and that your decisions just don't matter because they are pre-determined. I have used quantum mechanics in my career and my belief is everything is probabilistic.

[Liberty]

I think IV is going to be different things depending on how you define it (I know, that's a tautology).

 

By that I mean: If for you IV is the intrinsic value that a being with perfect knowledge of the future would assign to a security, then it is fixed.

 

If for you IV is the value that someone with imperfect knowledge would assign at a particular point in time, then it'll vary as new information is known and events change the business.

 

Maybe there should be two names for these two things, but lots of people seem to be using IV to mean both.

[racemize]

I think IV is going to be different things depending on how you define it (I know, that's a tautology).

 

By that I mean: If for you IV is the intrinsic value that a being with perfect knowledge of the future would assign to a security, then it is fixed.

 

If for you IV is the value that someone with imperfect knowledge would assign at a particular point in time, then it'll vary as new information is known and events change the business.

 

Maybe there should be two names for these two things, but lots of people seem to be using IV to mean both.

 

I think strictly it would be the first, but since that's impossible and we can only use the second, probably we should just stick with that.  Or at least we should stick with that in our own models/thinking.

[mikazo]

I think a more accurate description of a single intrinsic value would be the following: There is only one intrinsic value for a single point in time. Think of the following example:

 

You build a factory and it becomes more and more efficient each year, thus its intrinsic value is growing each year. After 100 years, there is an accident at the factory and it explodes into smithereens, rendering it completely and utterly useless. At time = 100 years, its intrinsic value is zero. Does that mean it wasn't worth building in the first place? Or do you do a discounted cash flow analysis? Do you include year 100, where cash flow is zero? Or do you ignore year 100 and do your analysis up to year 99? Whether you include year 100 or not, you get a different intrinsic value.

 

So it all depends on your end point in time, even if you have perfect knowledge of interest rates and cash flows. You get a different answer, depending on if you sell the business at year 99 for lots of money and thus realizing your return on investment, or you sell at year 100 for 100% loss.

 

Exactly. Plus every year there is some probability the plant will blow up. Maybe a 1% chance that it blows up in year 10. So if you could restart at the initial point in time 100 times one of those time-lines the IV would be zero in year 10 and 99 time-lines it would not. Saying there is one IV is equivalent to saying your whole life is predestined and that your decisions just don't matter because they are pre-determined. I have used quantum mechanics in my career and my belief is everything is probabilistic.

 

Agreed.  :)

[Palantir]

Well, how do you know there is even something called intrinsic value?

[mikazo]

Well, how do you know there is even something called intrinsic value?

 

The Austrian School of economic thought claims that all valuation is subjective (i.e. there is no "one true value" for any good).

 

See this article: http://en.wikipedia.org/wiki/Subjective_theory_of_value

 

"The subjective theory of value supports the inference that all voluntary trade is mutually beneficial. An individual purchases a thing because he values it more than he values what he offers in trade; otherwise he wouldn't make the trade, but would keep the thing he values more highly. Likewise, the seller agrees to trade only if he values his good less than the price or good he receives. In a free market, both parties therefore enter the exchange in the belief that they will both receive more value than they give up."

 

Therefore, intrinsic value is subjective and changes per individual...?

[enoch01]

Either Justin Bieber will end up in an asylum, or he won't.

 

Either ExxonMobil will produce $1 trillion over it's existence, or it won't.

 

In these examples, it could have been otherwise, but there is only one way it will turn out.  The rest is educated guesswork.

[Otsog]

Well, how do you know there is even something called intrinsic value?

 

I think, therefore I value

[premfan]

IV to me is earning potential. Company did "x" last year did it increase IV?  You never know if any company action increases IV until it manifests itself years down. I only use IV for stable predictable business's with a moat and pricing power. The increase in earning power is a price increase. The price increase increases IV ( if the business has operating leverage).

 

 

Say i want to buy a commerical property. I put down 50 percent in cash. Has my IV of my company increased or decreased? Many variables like i'm i adding value by opening up a business or renting it out to a tenant. Whats the greater ROIC? I would go with opening up a business. The income increase wouldnt manifest itself until there is momentum in the business which could take a year or longer. So as an investor in my company would you say my IV increased with the purchase of the commerical property? The answer i think is no one knows but if there is a track record of success and the business is in a system of similar business's that the company developed with a high ROIC. You would say yes the commerical property at the time of purchase increased IV due to future earning potential down the line.

 

IV is much easier to predict in business's with a track record of success. So its definitely a useful tool.  Each company action will have to be gauged if it increases or decreases future earning potential. Earning potential is the key metric. Determing potential is subjective though. Everything has potential. The execution of that potential is the determining factor. If a company has a poor history of execution why would i think its going to be different in the future.

 

[JBird]

Only if you are a stout determinist could this possibly be true.  I.e.  If it is possible that the future only has one potential outcome and that outcome is knowable, then there could only be one IV.  Since the second condition is undoubtedly false, it is much better to assume a range of IVs. 

 

Perhaps you read my first post too fast. There are a huge range of theoretical outcomes for IV, but only one eventual outcome. Without oracular vision, that outcome is not knowable. We're all somewhat clueless about the future, so we estimate a probability-weighted range of IV.

 

Additionally, even if you knew the CFs the company will generate, you still could make the argument that there are multiple IVs based upon different discount rates.

 

I'm not certain, but I think you're right. Any discount rate that's at or above the risk-free rate could be the "right" rate. I'd like Eric's opinion on this one.

[Palantir]

Despite the fact that time only reveals one outcome for intrinsic value, we know there are a huge range of theoretical outcomes.

 

But again, how do you know that time will reveal the outcome of IV and how do you know when you are at IV? Also...how do you know IV even exists? Serious question btw. The way I see it, IV is just an arbitrary construct of "this is what I think others would pay for it if they saw what I see".

 

 

Value investors doing existentialism.

[premfan]

Despite the fact that time only reveals one outcome for intrinsic value, we know there are a huge range of theoretical outcomes.

 

But again, how do you know that time will reveal the outcome of IV and how do you know when you are at IV? Also...how do you know IV even exists? Serious question btw. The way I see it, IV is just an arbitrary construct of "this is what I think others would pay for it if they saw what I see".

 

 

Value investors doing existentialism.

 

I like your contrarian nature towards IV.  Heres a question say i earn 60k a year. I save up money and get accepted to a elite business school. Does my IV increase after graduation?

[Palantir]

Certainly, you become a more valuable asset, so estimated IV would increase.

[enoch01]

Despite the fact that time only reveals one outcome for intrinsic value, we know there are a huge range of theoretical outcomes.

 

But again, how do you know that time will reveal the outcome of IV and how do you know when you are at IV?

 

When the company goes out of business, count the cash it created (or consumed).  Go back to any time in history and discount.

 

Also...how do you know IV even exists? Serious question btw.

 

If it is a product of cash produced and discount rates, and if both of those things exist, then IV exists.

 

The way I see it, IV is just an arbitrary construct of "this is what I think others would pay for it if they saw what I see".

 

That is a helpful or harmful way for you to see it, depending on which market participant is doing the observing.

 

Value investors doing existentialism.

 

Sign of a market top?

[premfan]

Certainly, you become a more valuable asset, so estimated IV would increase.

 

Palantir,

 

I would say use that same logic in business. Any action that management executes would have to be gauged subjectively as an action that increases future earning potential or decreases. I use subjective cause it is subjective unless you are coke and the other stalwarts. Management execution is the most important factor if your asset is earning more or less in the future.

 

Replace management with "you". You want to increase your spanish language potential (SL) would it increase going to spanish class or increase going to the bar?  Stuff like that. You want to increase your salsa dance potential would it increase getting private lessons or group lessons? 

[Palantir]

I agree that there is earnings potential, but to me it seems fluid, and different depending upon who is evaluating. AKA I may think you have a great post MBA future, but maybe employers disagree with me. In a sense your IV depends on the people evaluating you (the market) rather than any intrinsic ability you may have. But we can reasonably estimate that it will increase.

 

As a result I disagree with the notion that value is an intrinsic property or that it can be estimated/revealed.