A tool designed to determine the difference between a company’s intrinsic value and its market price provides a cushion against uncertainty in investment valuations. For example, if a company’s intrinsic value is estimated at $100 per share and the current market price is $80, the buffer is $20. This buffer helps mitigate the risk of overpaying for an asset.
Utilizing this type of valuation methodology is considered a crucial aspect of value investing, a strategy popularized by Benjamin Graham and Warren Buffett. It offers potential protection against market volatility and errors in intrinsic value estimations. By focusing on purchasing assets below their inherent worth, investors aim to minimize downside risk and maximize potential returns. Historically, employing such a buffer has been a key component of successful long-term investment strategies.