As an investor, do not chase headlines.
A stock is “hot,” property prices in Lekki are “booming,” or Treasury Bills are “safe.”
Always remember underneath the noise, every asset has something more fundamental: its intrinsic value.
That is what separates:
Intrinsic value is simply the real worth of an investment, based on the cash it will put in your pocket in the future, but expressed in today’s naira.
This means you must factor in:
Think of it this way:
An investment of N1 million in government securities (Treasury Bills or bonds) that promises N5 million in 10 years is not the same as an investment of N1 million in corporate bonds that promises the same N5 million in 10 years.
So how do you actually estimate the real value of your investment today?
That’s where the discount rate comes in. The discount rate is simply a measure of risk and opportunity cost.
It answers the question:
“What return could I earn elsewhere with similar risk?”
The rule is simple: the riskier the asset, the higher the discount rate you must apply.
Let’s bring this home with an example.
At first glance, Kunle’s deal looks better; N15 million beats N10 million. But when we apply the discount rate:
Surprisingly, Ada’s government bond has slightly higher intrinsic value than Kunle’s corporate bond.
Surprisingly, Ada’s government bond has slightly higher intrinsic value than Kunle’s corporate bond.
Why? Because government securities are considered risk-free, no matter the situation, the government must pay it back. But a company can run into trouble and fail to pay.
The key lesson? The same N5 million in the future is not always worth the same as today. The higher the risk, the higher the discount rate, and the lower the present value of those future cash flows.
To surpass the intrinsic value of Ada’s government bond, Kunle’s corporate bond would need to promise at least N15.45 million in 5 years, not just N15 million.
This shows the extra reward investors must demand to take on a higher risk. Without it, the seemingly bigger payout is actually worth less in today’s terms.
So, before you jump on the next “hot” stock, “booming” property, or “safe” investment, pause and ask:
“What is the intrinsic value of your investment, after accounting for risk, time, and opportunity cost?”
Because that’s the difference between chasing paper wealth and building real value.