Intrinsic vs Market Value

Intrinsic value is what an asset is worth based on its fundamental ability to generate cash flows or utility — independent of what anyone is willing to pay for it today. Market value is the price at which the asset trades. The gap between them is the core of value investing: buy when market value is below intrinsic value; avoid or sell when market value is above it. The discipline is to estimate intrinsic value with care and to treat market value as a voting machine that can be wrong in the short run.

Intrinsic value is not directly observable. You estimate it — typically via discounted cash flow (future cash flows discounted at an appropriate rate) or by comparing to the value of similar assets. The estimate depends on assumptions: growth, margins, discount rate, terminal value. Different analysts will get different numbers. The point is to have a reasoned estimate and to update it when new information arrives. Market value is observable — it's the last trade or the mid. The market can misprice an asset because of sentiment, liquidity, information asymmetry, or momentum. It can stay wrong for a long time. The value investor's edge is patience and a better estimate of intrinsic value.

The model applies beyond stocks. A company may be worth more to a strategic buyer (their intrinsic value for it) than its public market value — that's the logic of take-private and strategic M&A. A founder may value their company by its long-term cash flow potential while the market values it by next quarter's earnings. The tension between intrinsic and market value is why "price is what you pay, value is what you get" — and why the goal is to pay less than value.