Its interesting to see how various people think about "true" value and "intrinsic" value.

My own thoughts are that "true" value or "intrinsic" value IV are not the most interesting way to look at an investment. What I would replace them with is IRR, Internal Rate of Return.

Both IRR and IV estimates are calculated from a knowledge of the cash flows associated with a stock. They are both attempts to figure out how good an investment is, but figure it out quantitatively rather than emotionally or rhetorically.

So what are the cash flows associated with a share of stock? They are actually quite simple. There is the cash flow out when you purchase the stock at one date, and then there is the cash flow in when you sell the stock, closing your position, at some other date. For non-dividend paying stocks that is it, two cash flows total from which the IV at the date the stock was purchased can be calculated to characterize the investment, or the IRR/CAGR characterizing the entire time interval from purchase date to sale date can be calculated from the same two cash flow numbers to characterize the stock.

It is remarkable to hear people talk about IV or "true" value as if it was some sort of constant thing, that the IV of the stock on September 2, 2026 is some dollar valued number. And what is that number good for? Well it seems we think if the stock was priced on that day at some amount below its IV or "true" value, we should buy it, while if it was priced that day at some value above its IV, we should short it, or at least consider delaying its purchase until either its Price falls or its IV rises.

But IV, or "true" value, as almost universally defined, is not just an unknowable number because we don't know the future cash flows. In fact, the IV we calculate for the stock on 9/2/2026 depends on what we decide to do with that stock in the future! Suppose we had a list of stock prices for the next 20 years. Then we could calculate IV.

where
DCR = 10.5% per year is the "true" Discount Rate we have somehow come to know and agree upon
T0 = 9/2/2026, the date we assume we bought the stock
IV(T0) = "true" value or IV of the stock on 9/2/2026
T1 = 9/1/2046 is the date, we are assuming here 20 years in the future, at which we will sell that share
Price(T1) is the price of the stock 20 years in the future which will wind up being the cash flow we will receive 20 years form now from selling the share.

Then the true value of the stock today is found by discounting the future cash flow back to its value today:
IV(T0) = Price(T1)/exp(DCR*(T1-T0))

But here's the fun part. Suppose we decided we were going to calculate the true value today as if we were to sell it 10 years in the future. Then
T1' = 9/1/2036 and
P(T1') = sale price 10 years from now.
and we will not be shocked if we find out:

IV(T0) = Price(T1')/exp(DCR*(T1'-T0)) the "true" value of the stock today if it is to be sold 10 years from now
is NOT EQUAL TO
IV(T0) = Price(T1)/exp(DCR*(T1-T0)) the "true" value of the stock today if it is to be sold 20 years from now.

So where is, what is, this "true" value, this Intrinsic Value, this ultimate touchstone of value from which all investment decisions shall be judged? It isn't even a single number that inheres in (or is intrinsic to) the object being valued. It is in fact a number that depends heavily on what the market winds up doing in terms of pricing the stock in the future, and even more arbitrarily than that, it depends on what we decide to do, when we decide to sell the stock.

So the IV or "true" value of a share of BRK stock today is not some difficult to figure out number because we don't know the future, it is instead some number that changes depending on when we decide we are going to sell the stock, so that even if we knew the future stock prices, we STILL wouldn't know the stocks true value today if we didn't yet know when we were going to decide to sell it.

Goodness gracious, what is Intrinsic about that?

Now IRR is not going to solve all of these problems perfectly, but it is going to function in a few ways that make it easier to compare apples to oranges and figure out which is worth more.

IV(T0) actually depended entirely on the FUTURE price at which the share was sold and did not depend at all on its current price. Look at the equations for IV, current price is not even in them. So it really should have been
IV(T0,P1,T1) = IV is the current value IF the share was sold at future price P1 at time T1.

IRR is essentially the slope of the line on semi-log paper between (T0,P0) and (T1,P1). So at least it actually depends on both the cash flow out at sale time AND the cash flow in at purchase time. And it makes explicit that the investment performance depends on both purchase price and sale price.

But here is why I like IRR:

Ticker       Company          2006 Price   2026 Price (Current)     Annualized IRR     Estimated Value of a $10,000 Investment
AMZN      Amazon.com Inc        ~$1.61           ~$254.98                 29%               ~$1,580,000
AAPL        Apple Inc           ~$2.55           ~$324.96                 27%               ~$1,270,000
GOOGL     Alphabet Inc          ~$9.61           ~$337.12                 20%                 ~$350,000
BRK.A  Berkshire Hathaway  ~$96,100.00       ~$758,500.00                 11%                  ~$79,000

Note how much different IRR is for each of these companies. And how meaningful. Honestly I look at these now and I REMEMBER 2006 and having no idea how different the returns of these investments could be. Even now I can tell you until I made this chart just now I had no idea how, quantitatively, these investments compared. I am 69 years old and have been thinking hard about investments for decades. During that whole time I didn't even know that stocks I heard of every day were TROUNCING the One True Berkshire Hathaway. Oh how we stared at the S&P500 "No look, BRK is beating it! Isn't it? That counts doesn't it?" And somehow we missed those stocks above as if IRR's greater than 20% were somehow unreal in a sense in which the S&P500 stayed magical. Meanwhile, the investment I had (BRK.B) which grew my $10,000 by a factor of 8 was being trounced by anywhere from a factor of 4X up to a factor of 158X by the great unwashed masses with their fancy FAANG stocks.

It is some consolation that at least I got to see Buffett being misunderstood when he said "I don't understand technology." Oh what a happy insider I have been!

I'm 69 now. And I bought some AMZN and some GOOGL to go with my BRK.B recently. I hope I'll keep investing until I am 89 in order to see whether or not I have finally learned something. Something like: 10% or 20% differences in IRR eventually amount to real money, I suppose.

But yeah If I published a table of the true retrospective IV's of these companies stocks looking back to 2006, I don't think it would be as powerful as this table, nor as easy to understand.

R: