Friday, 24 April 2009

Book Value and Intrinsic Value

Warren Buffett pointed out the difference between book value and intrinsic value.

"Book value is what the owners put into the business, intrinsic value is what they take out of it."

In another explanation offered in a 1996 Berkshire Hathaway annual report, he likened book value to college tuition paid, with intrinsic value being the income resulting from the education. The education and the dollars spent on an education mean nothing unless there is a resulting financial return.

The point: It's easy for investors to put too much emphasis on book value and not enough on intrinsic value.

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