The value of a business can be zero. Price can join it there. Now or later. Analysts will attempt to calculate their view of the intrinsic value of a business, and then compare it to the price. Value is dynamic, relative, and personal, and so no estimate of intrinsic value is the “correct” price.
It is possible to get caught in valuation no man’s land. Seduced by a model of what you think reality should be. Seduced by the impenetrable complexity of your perspective, and how smart that makes you feel.
Instead, calculating intrinsic value is like doing due diligence on a company you plan to work for. It’s not just about the quality of the job offer. It then matters what work gets done.
Investors with a quality mindset, will seek out businesses at a reasonable price, but what they are really looking for is what is being done. We tend to undervalue the future, and so it is profitable finding companies that sustainably do something of value and reinvest, creating wealth through a process.
A good idea is not enough. Those investors will very much consider the strength of the balance sheet of these companies, and the container (barriers to entry) in which value is created. Understanding the barriers that allow winners to keep on winning.
You don’t have to know what is going to happen in the future. If you don’t pay an excessive price, then the focus shifts to the quality of work being done, and the habit of reinvestment. It is not about outperforming others, or even looking at what they are doing. Not gambling. Not chance.
If a business creates and reinvests, with a resilient container, it will grow. If it consumes capital, it will shrink.
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