Investing and Intrinsic Value 

My Personal Narrative 

If you asked me five years ago, I could not have predicted how profoundly I would find myself entangled with investing in the stock market. Personally, I was lulled into investing from a rather basic reason; my mutual fund balance had decreased over the course of six years. From an initial balance of $8000 in my mutual fund, I had ended with a balance of $7200 after six years of leaving it in the account. Internally, I was aghast at the abysmal returns that investing with a bank had offered me. I thought to myself that there surely had to be a better way to invest than with the bank and mutual funds…perhaps even I could do better? It was a dilemma I found myself in. The financial markets are for those suave white-collar financial experts on Wall Street, not for someone like myself with no financial background to speak of.  I began to slowly research how investing works through YouTube videos and to learn about traditional metrics of valuation such as Discounted Cash Flow (DCF) and Multiples Valuation models. Slowly and cautiously, I began to invest my hard-earned money over the years into the stock market. I had managed to save up around $90k by 2021, and by end of 2024 it had ballooned to multiple times that amount through investing. In hindsight, it was through sheer luck that I avoided many pitfalls of investing that retail investors are usually prone to.  

 *This is not financial advice. This article expresses the author’s personal opinion*

Figure 0. A signpost of Wall Street.  

Source: Nagle, Michael. Wall Street. 17 Sept. 2020. The Balance, https://www.thebalancemoney.com/wall-street-how-it-works-history-and-crashes-3306252. Accessed 16 Apr. 2025.  

Introduction 

There has been a plethora of new investors that entered the stock market since the start of the pandemic. “A study from Bloomberg Intelligence shows that during the first six months of 2020, retail investors accounted for 19.5% of all stock market shares traded…almost double the amount of retail investor trades from 2010” (Arora). In the short term, I believe stock prices are a game of supply and demand with shares of companies traded as commodities. However, I think that long-term stock prices ultimately converge to their underlying intrinsic or fundamental value. I believe that the three main pillars to a consistently successful investor are to: invest in good quality companies, do not overpay for a stock, and do nothing (not buying or selling too frequently). “Controlling for other factors, we find that on average, 15-30% of the difference between the stock price and the estimated intrinsic value is removed in a year” (Capozza and Israelsen 2). Hence, I propose that correctly timing when a company is slightly undervalued or overvalued (within a range of ±20%) in a given valuation model is insignificant to long – term returns.  

Short Term Investing  

In short-term trading, retail investors have an inherent informational disadvantage compared to larger institutional investors. An egregious example of this is when “insiders with noisy private information make biased public announcements to manipulate stock prices” (Titman 4). However, an even less pronounced way of gaining advantages over retail investors make it a losing game. “A decade ago, a company called Spread Networks spent about $300 million to lay fibre-optic cable…so traders could send data back and forth along the route in just 13 milliseconds, or thousandths of a second” (Osipovich). By having a lower-latency bandwidth than its competitors, a firm can hold informational advantage of when another big player may want to buy shares of a company. This shows one of the overwhelming advantages that large firms have in short-term high-volume trading. 

This relates back to short-term trading in a nuanced sense because it is trading stocks as if it were a commodity with no inherent value. In a simplified sense, imagine a core holding of a 70% of a stock owned by institutional and insider players with the other 30 percent making up the float of shares for potential buyers to purchase. As demand in the stock increases the remaining retail investors are bidding higher and higher for any available shares in the float of shares available on the market and this increases the stock price. This works in the opposite direction as well. When interest in a stock decrease, fewer competing bids are entered. Holders become increasingly interested in selling their stock and the lower the competing bid needs to be in order to purchase the stock.  

Figure 1. (Top) As demand increases, buyers are bidding higher and higher on the remaining shares in the float. (Bottom) Stock price decreases because of decreased interest in a stock and increased supply of shares in the float. 

Long-Term Investing 

 For long-term investing, I believe that a company’s ability to sustainably grow its net income and Free-Cash Flow (FCF) is the intrinsic value and the determining factor in considering whether to invest in it or not. In a simplified context, imagine company ‘A’ with a share price of $100 and a net income of $7 billion. If it wanted to, the company could redistribute a portion of its net income to tangibly enrich its investors. We will refer to this as the implied dividend yield. Now, let us consider the following four scenarios in Figure 2 and apply them to the past performance of real stocks.  

Figure 2. Four possible scenarios for Company A 

Note that I am not suggesting investors to buy dividend stocks. Instead, I am using this unofficial implied dividend as a hidden metric to visualize the intrinsic value of stocks. See Figure 3 (Scenario C) and Figure 4 (Scenario D) for a visual illustration of a stock that is valued close to its intrinsic value over time versus a stock that is massively overvalued when compared to its intrinsic value. We can see that for MSFT stock in Figure 3, the dotted line represents the intrinsic value, and it roughly coincides with an increase in stock price over time as its fundamentals improve. On the other hand, Figure 4 shows Scenario D in our example, with the stock price being massively overvalued compared to its intrinsic value or fundamentals. Inevitably, the overinflated stock price of ELF converged back down to its intrinsic value. Scenario A only exists in theory and not reality, since a 40 percent dividend yield stock will quickly be bought up and bring its stock price up while decreasing the proportion of the company that you own relative to others, thus decreasing the implied divided yield. For more empirical data, we can see Figure 4b) and Figure 4c), where Costco’s diluted EPS growth coincides almost exactly with the gains in the stock price over a long period of time.

Figure 3. Microsoft Stock has a stock price that hovers close to its intrinsic value.  

Source: Kalm , Viktor. MSFT Intrinsic Value. 29 Jan. 2025. Alpha Spread, https://www.alphaspread.com/security/nasdaq/msft/summary. Accessed 10 Apr. 2025.

Figure 4. (Bottom)ELF stock was massively overvalued and converged back to its intrinsic value.  

Source: ELF Intrinsic Value. 2025. Alpha Spread, https://www.alphaspread.com/security/nyse/elf/summary. Accessed 10 Apr. 2025.

Figure 4b). Costco’s diluted EPS growth is at 14.93% over a longer time period  

Source: COST Costco Wholesale Corporation Growth. 2022. Seeking Alpha, https://seekingalpha.com/symbol/COST/growth. Accessed 2025. 

Figure 4c). Costco’s share price growth is 15.15% from the year 2002 to 2020. 

Source: Carlson, Joseph. Costco Average Annual Return. Jan 14, 2022. Ticker Tech. https://www.youtube.com/watch?v=e0sgzE-CUkA

Figure 5. (Top) Growth slows to less than 2% for PG stock 

(Bottom) The company starts to give out more dividends to shareholders 

Source: PG Earnings and Revenue. 2025. Google Finance, https://www.google.com/finance/quote/PG:NYSE?sa=X&ved=2ahUKEwiVmeLBrt6MAxUAJjQIHU9IOykQ3ecFegQIPxAX&window=MAX. Accessed 2025.

Figure 5b). Proctor & Gamble gives increasing dividends per share over time 

Source: Splits & Dividend History. 2025. PG Investor Relations, https://www.pginvestor.com/stock-information/splits-dividend-history/default.aspx. Accessed 2025.

Advantages of Long-Term Investing 

 Long-term investing invites a host of advantages compared to short-term investing. Looking past the informational disadvantage that retail investors experience, there are capital gains tax advantages and a high probability to earn more than day-trading. I conducted a simulation of day-trading versus buying and holding one share of Microsoft stock in the excel spreadsheet below. It compares buying and holding one share of Microsoft from December 2019 to December 2024 versus using the ‘=INT (RANDBETWEEN (0,1))’ function in Excel to determine a fifty-fifty chance between buying or selling on any given day. This assumes that the day trader holds no informational advantage is simply gambling with a fifty percent chance to buy or sell every day. A larger sample size of the experiment can be seen in the table below.

Figure 6. Comparing Buying and holding one share of Microsoft stock (green) to day trading (blue) 

Figure 7. Conducting 50 trials of day trading simulations from the previous Excel setup, we get an average gain of $161.67 by trading over the same period with a standard deviation of 93.75. 

This highlights how holding long-term usually offers more gains than randomly day-trading, but there is also another advantage. Namely, if you hold a stock for at least a year before selling it, you are privy to a capital gains tax advantage. Let’s say you buy many shares of a stock and have an initial fair market value (FMV) of $100 000. If that amount appreciates to $250 000 after a year of holding the stock, then you have a profit of $150 000. Under Canada’s tax code, it is subject to a capital gains tax advantage because you held for at least one year. “In Canada, the capital gains inclusion rate is one-half (50%). In other words, only 50% of a capital gain is taxable” (Dallaire). Therefore, of the $150 000 that you gained in profit, only $75 000 is taxable and added to your income to be taxed at your marginal tax rate.  

Many studies have shown short-term traders underperform the market (big ETFs). “Short-term day trading profits and long-term performance are negatively related” (Linnainmaa 3). This is similar to an interview I had with a friend who day traded. Martin Robinson is a day trader that has developed his own trading bot that is based on factors like relative strength index (RSI), moving-day averages and other technical trading signals. “In my mind, high uncertainty is a huge opportunity if you have perfect information and becomes less of an opportunity as your information decreases. Say for example the average investor has 50% information on macroeconomic and financial effects of implementing 20% tariffs on all goods. Then, say another investor spends many hours researching how tariffs work and how different industries will be impacted, bringing them to 70% information. This learned investor has a better chance to correctly predict the size of price changes than the average investor, and thus taking advantage of the uncertainty” (Martin Robinson, personal communications).    

As rational actors in a changing market-place, day traders inherently believe that they have an informational advantage over other actors in the financial market. Linnainma asserts that “the act of day trading itself induces individuals to migrate towards riskier portfolios” (23). The allure of increased volatility skews day-traders towards more riskier stocks that tend to have high fluctuations in stock price over a shorter period of time. However, the market does not always respond rationally to events in the short term. I have witnessed companies beat analyst earnings expectations and you would assume that this means it is good news, and the stock price will increase. Nevertheless, that is not the case, and I have seen the stock price drops right after a beat in earnings.  If we look at Figure 8, we see that TTD stock beat earnings, with a slight miss on revenue on February 12th, and the stock price tanked that day. To a day trader, this could be a harrowing event where they cut their losses short and sell the stock. However, as a long-term investor, if I see a good company beat earnings and the fundamental business model has not changed in its ability to generate income and free-cash flow, then I buy even more of the stock.

Figure 8. $TTD stock price drops 32% on February 13th, which is the day after they reported a beat in earnings with a slight revenue miss.  

Source: TTD stock. 2025. Google Search, https://www.google.com/search?client=firefox-b-d&q=ttd+stock. Accessed 2025.

When should I buy/sell a stock if it is massively overvalued/undervalued?  

There may be a hole in my argument if you look closely at what has been presented so far. The prevailing question being, should you sell a stock when it becomes overvalued based on its intrinsic value?  I have used a baseline of  as a good determining factor of buying a company, given that it is also a good quality company. However, there is no case so far for if a stock price grows to be +100% overvalued or it plummets to becoming severely undervalued. For stocks where the stock price dramatically drops and becomes undervalued, if you are owning the stock already, it is best to simply hold the stock as it will converge back to its intrinsic value. If you do not already own the undervalued stock, then using something similar to a buy trailing stop order is useful to capitalize on the event. Let us look at Netflix below in Figure 9. There was an announcement around March 2022 that Netflix would change its policy to charge extra for password sharing or completely crack down on it altogether. We can see that the stock price immediately reacted to this news and the stock completely plummeted. For those holding Netflix stock, it was a harrowing event. However, if you had cash on hand, it was an opportunity to buy. You can see through my markup annotations below that even while it was crashing, the stock rebounded slightly at multiple points along its descent. 

It may be controversial, but I have found the best entry point is to set a buy trailing stop order of around +20%. What this does is set an order to start tracking the local minimum from when you executed the order and when it reaches +20% from the local minimum, it executes and buys the stock automatically. It is a trade-off that allows you to follow the greater trend of positive market sentiment up, when the market realizes that the cracking down on password sharing did not actually harm the business, while also mitigating risks of buying too early when the stock is still falling. Conversely, let us go back to Figure 4 with ELF stock. If we already own the stock and see the stock price reach >+100% of its intrinsic value, I advise you to hold the stock. However, you should cautiously set either a manual reminder on your phone or a trailing sell limit order with a trigger delta of -20% and an arbitrary limit delta. This is basically the same principal as before, just in reverse. The added limit delta is necessary to avoid the shares from being sold off at an unfavourable price below its intrinsic value in the event of a flash crash. Flash crash is defined as an event where the stock suddenly plummets, and many traders cannot sell off in time. The limit delta ensures a minimum price that you are willing to sell for at the expense of the order not being guaranteed to fill. See Figure 10 for an example of what a trailing sell stop limit order looks like.  

Figure 9. Netflix had a major drop around 2022 due to its announcement of cancelling account sharing policies.  

Source: Netflix Stock . 2025. Google Finance, https://www.google.com/finance/quote/NFLX:NASDAQ?sa=X&ved=2ahUKEwiZvPWRs86MAxU5KDQIHdeeNC0Q3ecFegQIPhAX&window=5Y. Accessed 2025.  

Figure 10. An example of trailing sell stop limit order with a trigger delta of -20% and a limit delta of $1 for SOFI stock. At a stock price of $10.52 for the given day, this means that the order would be executed if the stock drops 20% to $8.416 but will not sell below $7.416. Note that the $10.52 it is comparing it to is only the temporary local maximum, if the stock price goes up after you set the order, the local maximum will automatically readjust.  

Models of Valuation 

 I will not go into too much detail here about models of valuation. I believe that a brief summary about the underlying principle will suffice for the purposes of this article. Any further research into the subject matter is left as an exercise for the reader. “Discounted cash flow (DCF) is a valuation method that estimates the value of an investment using its expected future cash flows” (Fernando). Then it discounts the future cash flows back to the present using a discount rate, which allows us to come to a rough approximation of a company’s intrinsic value, see Figure 11.  

Figure 11. Using Discounted Cash Flow (DCF) model, we arrive at an intrinsic value of $279.65 for AAPL stock. 

Another common model of valuation is a multiples valuation, which compares a company against the P/E of other companies in the same industry, see Figure 12. I recognize that these are oversimplified ways of conducting these models of valuation, however, it is difficult for me to encapsulate the intricacies of different valuation models within this article.  

Figure 12. Simple Multiples Valuation of a new tech company compared to other tech companies in the same industry.

Characteristics Of a Good Quality Company 

On top having a sense of a stock’s intrinsic value, it is important to see if the underlying company is one of high quality. As an investor a company’s main role is to offer a return on capital from the investment. The characteristics that make a company able to consistently grow its net income or free-cash flow are what constitutes a high-quality company. First, we can look at the possible ways that a company spends money.  According to Cunningham “a company can choose to allocate capital in one of four main ways: capital expenditures for growth; advertising and promotion for R&D; mergers and acquisitions; or distributions to shareholders through dividends or share buybacks” (11).  There is an important distinction to be made here; money spent on growth and expansion is different from money spent on operations to keep the company running. Operations costs should be kept to a minimum, while research and development is necessary to improve company efficiencies and continue growing. “To achieve sustained high returns on capital requires possessing features that protect returns from competition; namely, competitive advantages” (Cunningham 19). A strong economic moat, that is, a company’s ability to keep its competitive advantage over potential competitors allows it to thrive in the long term. A stock like this is relatively resistant and deserves a premium stock price that might defer it to having a slightly higher intrinsic value compared to its competitors. High profit margins or growing profit margins also signal a company that is sustainably growing and is characteristic of high-quality companies.   

In the past decade, tech stocks have dominated the stock market in yielding high returns with relatively low downside compared to the opportunity cost of not owning the stock. The robust tech industry hinges on unique characteristics of technology which makes a large number of them high quality stocks on the upper end of the spectrum. They have high profit margins, low operating costs, and an incredible ability to scale up. Microsoft is a good example of this, the software has a relatively low cost to produce, with most of the costs going to stock-based compensation, thus allowing it to maintain high profit margins. A subscription model gives it reliable income and it has an ability to scale in ways that hardware companies cannot. One software program can be sold to billions of people worldwide without the need to spend on materials to make a physical product such as a car. These are my opinions on the characteristics of a good quality company, however, as trends change every decade, the best performing sector for stocks and likewise the criterion on which to judge what a high-quality company is, will change. If we look at the best performing industries over the past few decades in Figure 13 below, we notice that they are distinctly different every decade. This illustrates the difficulty in investing in winning industries for the duration of your investing career. It is important to invest in companies and industries that you understand. Every good investor will miss out on many good opportunities, but investing in businesses that you understand will help prevent you from losing capital in businesses that you do not understand.  

Figure 13. The best performing industries have varied over the years. 

Source: Felix, Benjamin. “Why Betting On ‘Winning’ Industries Almost Never Works 

High Risk, High Reward”. Youtube. Nov.10, 2024. https://www.youtube.com/watch?v=3B9umhfv_ww 

Retirement 

The relevance of individual investing and saving for retirement has never been more indicatively linked. Since the late twentieth century, self-guided investing has become an increasingly important component in planning for retirement. “Over the past thirty-five years, participant-directed 401(k) plans have largely replaced professionally managed pension plans” (Fisch et al. 606). Shifting the mantle of responsibility from financial experts with some educational background on the subject matter towards retail investors with no experience in investing is, in my opinion, fiscally irresponsible. But nonetheless, it is a phenomenon is that is occurring across many first world countries including Canada as well. As life expectancy increases and the number of people contributing to the Canada Pension Plan (CPP) decreases, “corporate employers are closing their traditional defined-benefit (DB) plans, and many of the DB plans that do remain have insufficient assets to cover their liabilities” (Ambachtsheer 8). This shifts the burden and responsibility of self-directed investing onto retail investors to navigate on their own.  

Conclusion 

 The past decade has seen the largest influx of retail investors into the stock market ever seen before. On top of being psychologically challenging to navigate the stock market on your own, it can seem complicated and overly convoluted. By looking at the intrinsic value of a company and evaluating the quality of a company based on its ability to sustainably grow, we can make smarter investments. I strongly believe that if you are investing in high quality companies, the return on investment will roughly converge to the diluted EPS growth over a long period of time given that you bought the company at a reasonable price. I see owning stocks as owning a portion of a company and being privy to a portion of the underlying company’s earnings. And heralding in an age of unprecedented wealth inequality, this may be the primary vehicle of wealth generation that can close that gap between the rich and the poor. Wages have stagnated, but wealth has dramatically increased for the upper echelon. I see stocks as an equalizer that can close that gap. The barrier to entry for investing on your own has never been lower, so I hope my brief introduction into stocks can help you make wiser, more consistent returns for your own investments.

References 

Fisch, Jill E., and Tess Wilkinson-Ryan. “WHY DO RETAIL INVESTORS MAKE COSTLY MISTAKES? AN EXPERIMENT ON MUTUAL FUND CHOICE.” University of Pennsylvania Law Review, vol. 162, no. 3, 2014, pp. 605–47. JSTOR, http://www.jstor.org/stable/24247864. Accessed 10 Apr. 2025. 

Ambachtsheer, Keith. “Why we need a pension revolution.” Canadian Public Policy, vol. 34, no. Supplement 1, Nov. 2008, https://doi.org/10.3138/cpp.34.supplement.s7.  

Capozza, Dennis R., and Ryan D. Israelsen. “How quickly do equity prices converge to intrinsic value?” SSRN Electronic Journal, 2009, https://doi.org/10.2139/ssrn.1357841.  

 Titman, Sheridan, et al. “Corporate actions and the manipulation of retail investors in China: An analysis of stock splits.” Journal of Financial Economics, vol. 145, no. 3, Sept. 2022, pp. 762–787, https://doi.org/10.1016/j.jfineco.2021.09.018.  

Osipovich, Alexander. “High-Frequency Traders Push Closer to Light Speed With Cutting-Edge Cables.” The Wall Street Journal, 15 Dec. 2020, www.wsj.com/articles/high-frequency-traders-push-closer-to-light-speed-with-cutting-edge-cables-11608028200.   

Bartlett, Robert P., and Justin McCrary. “How rigged are stock markets? evidence from microsecond timestamps.” Journal of Financial Markets, vol. 45, Sept. 2019, pp. 37–60, https://doi.org/10.1016/j.finmar.2019.06.003.  

Linnainmaa, Juhani. “The individual day trader.” University of California, Berkeley, working paper (2005). http://jlinnainmaa.com/Linnainmaa_wp2005b.pdf  

Dallaire, Justin. “Capital Gains Tax in Canada, Explained.” MoneySense, 28 Mar. 2025, www.moneysense.ca/save/taxes/capital-gains-tax-explained/.  

Fernando, Jason. “Discounted Cash Flow (DCF) Explained with Formula and Examples.” Investopedia, Investopedia, www.investopedia.com/terms/d/dcf.asp. Accessed 10 Apr. 2025.  

Cunningham, Lawrence A., et al. Quality Investing: Owning the Best Companies for the Long Term. Harriman House Ltd, 2016.  

Bursztynsky, Jessica. “Netflix Shares Fall 20% on Slowing Subscriber Growth.” CNBC, CNBC, 21 Jan. 2022, www.cnbc.com/2022/01/20/netflix-nflx-earnings-q4-2021.html.  

Arora, Krishan. “The Rise of the Retail Investor.” Forbes, Forbes Magazine, 13 Aug. 2024, www.forbes.com/councils/forbesagencycouncil/2022/11/04/the-rise-of-the-retail-investor/.  

Nagle, Michael. Wall Street. 17 Sept. 2020. The Balance, https://www.thebalancemoney.com/wall-street-how-it-works-history-and-crashes-3306252. Accessed 16 Apr. 2025.  

Kalm , Viktor. MSFT Intrinsic Value. 29 Jan. 2025. Alpha Spread, https://www.alphaspread.com/security/nasdaq/msft/summary. Accessed 10 Apr. 2025.   

ELF Intrinsic Value. 2025. Alpha Spread, https://www.alphaspread.com/security/nyse/elf/summary. Accessed 10 Apr. 2025. 

COST Costco Wholesale Corporation Growth. 2022. Seeking Alpha, https://seekingalpha.com/symbol/COST/growth. Accessed 2025.  

 Carlson, Joseph. Costco Average Annual Return. Jan 14, 2022. Ticker Tech. https://www.youtube.com/watch?v=e0sgzE-CUkA 

PG Earnings and Revenue. 2025. Google Finance, https://www.google.com/finance/quote/PG:NYSE?sa=X&ved=2ahUKEwiVmeLBrt6MAxUAJjQIHU9IOykQ3ecFegQIPxAX&window=MAX. Accessed 2025.  

TTD stock. 2025. Google Search, https://www.google.com/search?client=firefox-b-d&q=ttd+stock. Accessed 2025.  

Netflix Stock . 2025. Google Finance, https://www.google.com/finance/quote/NFLX:NASDAQ?sa=X&ved=2ahUKEwiZvPWRs86MAxU5KDQIHdeeNC0Q3ecFegQIPhAX&window=5Y. Accessed 2025.  

Felix, Benjamin. “Why Betting On ‘Winning’ Industries Almost Never Works 

High Risk, High Reward”. Youtube. Nov.10, 2024. https://www.youtube.com/watch?v=3B9umhfv_ww