Chapter 5. Better Valuation
5.1 Absolute value is what counts
Absolute value, or intrinsic value, involves estimating the future cash flows a business can make (even if this is just a matter of liquidating the assets) and valuing them against your required rate of return. This approach is not concerned with the market valuation or the rates of return other investors may be using.
By contrast, relative valuation involves comparing the valuation metrics of a company with its peers or the wider market. Here, a company would be viewed as undervalued if those metrics were cheaper than the relevant peers.
The whims of the market can have a great effect on relative valuations, so true value investing is mostly concerned with intrinsic value. At the ...