What Is Intrinsic Value? – Competitive Advantage

My definition of intrinsic value boils down to “a wonderful company fairly valued”. By judging 14 value elements I’ll determine if a company deserves this description. It’s my intention to select and buy stocks based on their intrinsic value and to thereby get rich slowly; rich enough, at least, to fund my retirement.

14 Elements in My Definition of Intrinsic Value
(1) Strong Cash Flow
(2) Strong Earnings Growth
(3) Dividend Consistency
(4) Consistent Dividend Increases
(5) Profitability
(6) The Formula: E(2R+8.5)*Y/4 = Intrinsic Value per share
(7) Good returns on equity
(8) Little or No Debt
(9) Business Model I Understand
(10) A Durable Competitive Advantage
(11) Measure Risk
(12) Reliable Long Term Dividend Income Stream
(13) Increasing Annual Dividends Faster than Inflation
(14) Expect at least a 9% Total Return Compounded Annually

(10) A Durable Competitive Advantage
Value element number (10) is taken from Benjamin Graham and Warren Buffet. They’ve frequently called it an “economic moat” or more often just a “moat”. The idea is that some companies have developed an unassailable position in their industry and markets. The advantage might come from brand loyalty as with Coca Cola and Altria (Marlboro Brand). It could derive from infrastructure as with WalMart and Burlington Northern or from a culture of innovation like Apple or Google. It could come from anything, but wherever it comes from and whatever it is, it gives a company a dominant competitive advantage. Berkshire-Hathaway’s competitive advantage is having Warren Buffet and Charlie Munger running the company.

Because the Moat, if it exists, could be anything it must be found through analysis and judgment. Since it can be intangible it can’t be calculated nor can the degree of advantage be easily calculated. So, I’ll assign a subjective integer score from 0 to 3 with a “3” meaning a maximum competitive advantage and a “0” meaning no competitive advantage exists.

I’ll rely on my research, my experience, and my judgment to assign the competitive advantage score knowing it’s an imprecise estimate and I’ll sometimes be wrong. I hope to err to the low side of the scale. That is, unless a competitive advantage seems obvious to me I’ll assume there’s none.

In my investment analysis I’ll prefer companies with higher scores but I won’t exclude companies solely because their score is low.

Next, I’ll measure risk; value element number (11),

Link to Other Topics in the Get Rich Slowly Report: What Is Intrinsic Value?