The Intrinsic Value Crisis: One Confused Charter Holder, the CFA Institute and the Future of Investing
When financial myths overshadow a foundation of investing principles
Remember, how we told you Pomp was confused about intrinsic value? He isn’t the only one plagued by this confusion. An even bigger offender just couldn’t resist the chance to slip into Pomp’s feed:
Dorman is a CFA and this is what he said in his 2019 post:
Let’s break this down starting with the term “intrinsic value”. This is an entirely made up term for investing, based on a philosophical concept, wherein the worth of an object or endeavor is derived in and of itself—or, in layman's terms, independent of other extraneous factors.
Made up? Nice attempt, Jeff, but you aren’t convincing anyone with that statement. He continues:
Further, when a stock trades at a 15x P/E ratio, or at 2x Price/Sales, or at 8x EV/EBITDA, these values are WAY above intrinsic value.
This is financial recklessness at its peak. The whole point is that a stock price can sit far above, far below or right near its intrinsic value–that’s precisely why the term exists. In the short term, pricing may be largely driven by extrinsic factors, but investing is built on the belief that, sooner or later, price will converge to intrinsic value.
If prices always mirrored intrinsic value, investing wouldn’t exist in the first place. But, they don’t and Warren Buffett is living proof of how one can take advantage. He turned $100 in 1964 into an impressive $5.5 million in 2024, Kevin O’Leary style. Meanwhile, the same $100 invested into the S&P 500 in 1964 would have amounted to the cost of an average car purchase in 2024. These results weren’t just luck. One Financial Analyst Journal article concluded:
Therefore, Buffett’s returns appear to be neither luck nor magic but, rather, a reward for leveraging cheap, safe, high-quality stocks.
In other words, Buffett was engaging in the act of investing and that’s exactly what he told you he was doing.
What happens when a stock’s price–or any other potential investment for that matter–far exceeds its intrinsic value? That’s a valuable insight–you know it’s not a viable investment at that price point. If the asset you are valuing in this case is a stock, you might actually choose to short it. Of course, speculation is always an option if you believe the price will drift even further from value.
There’s no shame in any of these approaches. Dorman’s real misstep is in failing to recognize that they represent distinct trading strategies. Here’s the subtitle to his post:
Every Investment is Speculation - Move on!
Then comes his conclusion, in caps and all:
EVERYTHING IN INVESTING IS SPECULATION!
See how slippery that slope is? The moment intrinsic value fades from focus, so does the distinction between investing and speculation. in Security Analysis, Ben Graham’s definition of investing did the exact opposite of what Dorman suggested– it firmly established the boundary between the two:
An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.
Graham was seriously concerned about this boundary disappearing. He offered a stark warning in his seminal book, The Intelligent Investor:
There is intelligent speculation as there is intelligent investing. But there are many ways in which speculation may be unintelligent. Of these the foremost are:
speculating when you think you are investing;
speculating seriously instead of as a pastime, when you lack proper knowledge and skill for it; and
risking more money in speculation than you can afford to lose. (emphasis added)
The irony is rich–without Ben Graham, the CFA Institute might never have existed. Yet, if charter holders can claim that every investment is speculation, they’ve effectively diminished the value of that very designation! Perhaps the CFA Institute should first test its members on Ben Graham’s core investing principles before asking them to devote hundreds of hours to the coursework.
This issue points to a much deeper, systemic shift in finance. Our bold prediction: Before long, the CFA Institute will face a defining choice. It must either reclaim its role as the steward of investing–reaffirming its commitment to Ben Graham’s vision and enforcing meaningful disciplinary measures against charter holders who contradict that foundation–or risk losing credibility altogether, diminishing the value of the charter itself.
A decision looms and the weight of its consequences will shape the future of investing. The CFA Institute must decide whether it will uphold its legacy–or allow its relevance to fade into obscurity.
