Invested: Ep. 159- When To Exit the Stock Market: Intrinsic Value

This week we continue our talk about when to sell stocks and when to get out of the market. Today you’ll learn how to ensure that when the stock market corrects, you have enough value to be able to invest and capitalize on the situation.

When to Sell a Stock

  • If we don’t have any money in our investment account, we can’t go buy a bunch of stocks when the market drops and it’s a good time to buy.
  • We have probably already deployed that money in other companies so should you sit around and wait for a crash?
  • Do you sell now just to sit around for a long time because we can’t time the market? Or do we stay in and hope to time it?

Timing the Stock Market

3 different views of how to figure out what price to pay for a company

  1. 10 Cap Method
    1. Based on owner earnings.
    2. Doesn’t tell us anything about the value about the true value of the business.
    3. Tells us the price.
    4. Value above price and margin of safety.
    5. A very precise way of coming to a price.
  2. Payback Time Analysis
    1. Based on free cash flow.
    2. Doesn’t really tell us the value of the business.
    3. Tells us how long it’s going to be before we get our money out of the business.
    4. Useful for buying a private companies or public companies at private company prices.
  3. Intrinsic Value
    1. What a company is actually worth as a business in a rational market. Not what the price is.
    2. Price is what pay, value is what you get.
    3. The market will get this right in the long run. The market is a good weighing machine for judging the intrinsic value of a business.
    4. In the short run the stock market is a voting machine.

Owner Earnings

  • If we look at a business the way we look at real estate. Expense – revenue + funds for maintenance = certain amount of money left that we can spend.

Free Cash Flow

  • Takes into consideration all the things owner earnings takes into consideration + more gap accounting.
  • Includes the money we are spending in capital items to grow the business.
  • Whats free that’s left that you are free to invest in any way.

How does intrinsic value become a trigger point to exit?

  • Looking to exit to use capital better.
  • Stock value can change very quickly – the story changes.
  • The reason to find the intrinsic value and to sell once it moves back up to its intrinsic value, it’s not going to have the kind of bump you just got.
  • Can deploy that money more usefully elsewhere.

Show Notes:

Danielle & Phil’s New York Times Best Selling Book Invested

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On the InvestED podcast, Phil and his daughter Danielle shine a light on the successful investing strategies that gurus like Warren Buffett have used for 80 years. Listen in for a great stock market education on basics, learn how to invest on your own, and follow along with real-time examples and investing tips from week to week.