When I was recently reviewing Empire Investing, I luckily stopped at the "value" step of their investment strategy, as this gave me time to reflect on a couple of things.
The first is the concept of intrinsic value, which most value investors will know well, as the traditional texts of Benjamin Graham and Warren Buffett refer to it often. I, however, don't subscribe to it. I simply don't believe that anything has an "intrinsic value" - the only "value" that can be placed upon something is someone's desire to have it.
A long term investor will value certain properties of a company very differently than a short term investor would value those properties.
Consider the example of a house. I could describe a house as "2 bedrooms, 1 bathroom, modern and in a nice suburb" to a room full of people, and ask each of them to create a baseline valuation of this house. It doesn't matter what valuation they come up with. I could then ask "and what is the change in value if I add a double-car lock-up garage on". To some people, this might de-value the house, (if for example they didn't have a car, didn't want one, and didn't need the storage space) and to others, like myself, it would add value to the house. So, what is the "intrinsic value" of the garage? It doesn't make sense.
So, what Buffett et al are referring to when they refer to intrinsic-value is actually value-to-them, as long term investors.
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