“Price is what you pay, value is what you get.”
~ Warren Buffett

What matters most in the long run when investing in a stock (part ownership of a business) is valuation, which is the price you pay versus the value you get. For every investment, you want to pay less for the asset than the intrinsic value you are getting.

Intrinsic value refers to the actual or perceived worth of an asset, investment, or company based on its fundamentals, such as earning power, assets, and qualitative factors like management skill and market position.

Most technology and internet companies that held IPOs during the dotcom era, the late 1990s, were highly overvalued due to hype, increasing demand, and lack of solid financial valuation. High Multiples were used on many tech companies valuations, resulting in unrealistic values that were overly optimistic and often insane. Investors failed to focus on the fundamental analysis of these businesses and overpaid. Fundamental Analysis assesses earnings, growth potential, balance sheet strength, and risk to estimate intrinsic value.

Three financial valuations ratios investors must analyze at a minimum are:

• Price-to-Earnings (P/E)
• Price-to-Sales (P/S), and
• Price-to-Free Cash Flow (P/FCF)

Always remember that every investment is the present value of all future cash flow. Just because a company is a growth story or opportunity does not mean you should buy the its stock at any price.

In contrast, investors should seek assets priced below their Intrinsic Value:

• Investing at a price below intrinsic value offers a margin of safety, reducing risk.
• Over time, markets may correct mispricing, causing assets to rise toward their true intrinsic value, benefiting the investor
• Paying less than intrinsic value is a core concept in value investing, popularized by Warren Buffett and other fundamental investors

In every investment, a great story or opportunity can become a bad investment if you overpay.  Paying too high a price can decimate returns.  The value of a stock is relative to the number of earnings it will generate over the life of it’s business. The value of a stock or asset is determined by discounting all future cash flows back to present value, This is known as intrinsic value.

For investors, focus on a stock’s intrinsic value, not just the stock’s price. Chasing the hot stocks without evaluating value is not investing, it’s gambling.