 Good day, film investors. Now we have been discussing what is a margin of safety and how to calculate it in a stock and that's the first value investor's rule. The second rule is find the intrinsic value. What's the actual value of a stock? Stock prices go up and down but what's the real value and learning how to get to the real value of the stocks really helps you in investing but that real value is different for everybody and you have to find what is your real value, your intrinsic value for the stock and today we'll explain a few ways to do that and on an example in this case, catchers. So let's start with the definition of intrinsic value by Buffett. It's the discounted value of the cash that can be taken out of a business during its remaining life. So you have to take a business and then see okay what are the current earnings or the cash flow whatever you focus depends again on the business. Let's take earnings the easiest and then see okay what will happen to those earnings in the next 10-20 years and then discount that value using your discount rate. There is an easier way to discounting just look what will be the earnings I don't know three years from now put the valuation that you think is fair for you as an investor on that earnings. Let's say future earnings are three dollars put evaluation of 20 the stock price your fair value in three years is then 60 three times 20 is 60 if the stock price is 20 and in three years it will be 60 then you know okay it's a buy if the stock price is 80 and you think the intrinsic value is 60 then it's a sell. So that's how it's easier to do it instead of discounting just look at the earnings give it evaluation and then you have your intrinsic value however you have to find what will be the earnings in the future so you have to look at the earnings now look at the margins look at the projects look at what will go on in the sector will be there a lot of competition that we squeeze the margins all the company has a healthy business model that can continue to grow as planned. If the management says and you agree by outside independent research that what the management is saying is good then you can extrapolate that and let's say it grows 20% extrapolate that growth into the future. A stock that I followed recently exploded when earnings came out and I don't remember when I recommended this stock I think it was August or June nevertheless now it's 40% higher so you're welcome if you follow the recommendation. What happened to sketches if you look at the stock price in the last three years it shoot up in excitement on retail on sales on growth and then it fell from about 50 to below 20 at one point it went to 19 and then fluctuated and I think now it's about 34-35 these are crazy fluctuations for a company that is growing at a healthy rate has been growing expanding in the world what has been going on well everybody was looking at sketches US retail sell sell sell however sketches has more than 50% of revenue from outside the world and as you can see here in the fundamentals the company was growing at a steady pace constantly especially in the last few years expanding in the world and earnings per share are 1.44 don't think these are adjusted now they're a little bit more so what did I do I looked at current earnings per share 1.5 dollars per share I looked at the company okay stagnation in the US retail stagnating okay people are going to buy there is no more growth in the shoe in the shoe selling business however the company was growing at double digit rates in China and South Korea Asia and wherever around the world and in Europe and when I walked around the streets I saw a lot of older people wearing sketches I don't care who buys it doesn't have to be sexy to be bought as long as it makes money and then I saw okay the company will grow at 15 per year and then I said current earnings 1.5 multiply that by 15 per year and in three years will be above two dollars per share two dollars per share my intrinsic value is a return of at least 7.5 percent which implies a price earning ratio of 15 I don't go at a higher valuation so 2.2 dollars times 15 my target price was 40 the market's target price would be price earning ratio of 25 2 dollars times 25 50 so according to the market it's still undervalued it could go to 50 as it was the case and it will probably go but I don't know anymore already sold when the stock price hit 30 so you look at the earnings you look at what will go on the funny thing with SketchR was that they were changing their business model in South Korea good market for them but they were selling at wholesale and now they were going in retail thus their sales were postponed by at least a quarter to quarters this lowered earnings in the past quarter the stock price went down was hammered and then increased earnings in the future quarters what's very important is to see also how a company reacts to news about the sector in this case SketchR's reacted to news about the sector in US while the company is totally unrelated well not totally unrelated but mostly focused on China and Asia just take a look at this retail sector in harm's way after food lockers result food locker US and all the stocks in the retail get hammered this is because people sell everything sell their ETF which is consequently forced to sell stocks on the market and everything is sold even if some companies have absolutely no relation to what has been sold recent news SketchR beats by 15% bits of revenue as it was known that this will happen however the market focused on the sector news not specific company news also extremely interesting when SketchR's posted the result all retailers exploded even if they have no relation to SketchR's no relation to Chinese sales and so on so that's crazy how the market works and this is what we have to take advantage so by calculating intrinsic value because you need to know what's the intrinsic value of those stocks in order to see which are overvalued and which are undervalued especially in a market like this one that moves in tandem doesn't matter if you're good it matters only if you're in the sector and this creates the opportunity for value investors and then you have news like this SketchR lights a torch in the retail sector they grew in China not in the US but nevertheless doesn't matter to the market I don't I cannot believe that the market is this way but that's how it is so it's not that difficult to calculate intrinsic value you have to look at the earnings look at what will happen in the future and then attach your valuation what's my expected valuation from the investment and that's it then you have your intrinsic value and around that intrinsic value you make your investment decisions you look oh undervalued overvalued selling buying and so on and so on and then you have something to hold on if you combine that with the margin of safety that we have been discussed then you see how to buy when to sell what's the risk of the company also if your projections are wrong and then you are already talking low risk high reward returns was also very important to know always try to buy at a discount to intrinsic value intrinsic value 50 I like when the price is at 25 20 because I do so much research they are really can find those bargains hold them for six months two months three months a year two year three year and then wait for the intrinsic value to be hit if you don't have time to do research then I say okay my intrinsic value is 10 return wait till Berkshire has a price earnings ratio of 10 and then buy apple had a price earnings ratio below 10 a year and a half ago and you wait for those opportunities you buy then and you will have returns above 10 percent in the future so it's that simple yes it is however nobody likes simple stupid things too bad for them thank you for watching looking forward to your comments I'll see you in the next video