14-07-2011, 05:09 PM
I understand that DCF can't precisely calculate the present value of the company, but it does give some indication with certain assumption as long as the earning/cashflow is not too volatile.
Quote:Hence, I don't use DCF at all during my analysis. I use a more holistic approach where I look at quantitative and qualitative factors, and "simpler" approaches such as P/B and PER as well as NAV (in certain cases) works well enough.
freedom Wrote:hi d.o.g. From the last paragraph, it seems that you calculate the margin of safety using some other valuation methods. Can I know what they are? Or are you now more actively managing your portfolios to reduce the conservative requirement of margin of safety?
FFnow Wrote:I would like to know how do you determine at what price to buy if you do not do intrinsic value calculation through DCF?
Also, I believe DCF can be done on companies with predictable cash flow for the past 5-10 years. With such predictability, we can project the cash flow into the future to get the intrinsic value. Since we might not have perfect projections due to random errors, we use a margin of safety (I prefer MOS of at least 25% for stable companies). What's your take on this? Thanks.
freedom Wrote:I understand that DCF can't precisely calculate the present value of the company, but it does give some indication with certain assumption as long as the earning/cashflow is not too volatile.
Satchmo Wrote:DCF depends on the discount factor used, doesn't it. How does one arrive at what value to use?
(14-07-2011, 02:04 AM)d.o.g. Wrote: [ -> ]As I recall I had a debate with Sage over his reasons for selling one stock to buy another. His rationale was that stock A was better than stock B so he sold B to buy A. My quibble was that he didn't show that stock B was the worst holding in the portfolio, that it was not only worse than A which wasn't in the portfolio, but that it was also worse than C, D, E and F which were already in the portfolio. He refused to discuss the matter further so that was it.
(14-07-2011, 02:04 AM)d.o.g. Wrote: [ -> ]I think in the end fundamentally the big divergence was whether DCF should be the only valuation tool used. Sage felt so, while BRK and I did not agree.
Today I seldom use DCF because I rarely find businesses that lend themselves well to a DCF analysis. Exceptions include the shipping trusts and KGT, where revenues are fixed for a long period of time and expenses are modest in relation to revenues.
(14-07-2011, 08:11 PM)thinknotleft Wrote: [ -> ](14-07-2011, 02:04 AM)d.o.g. Wrote: [ -> ]I think in the end fundamentally the big divergence was whether DCF should be the only valuation tool used. Sage felt so, while BRK and I did not agree.
Today I seldom use DCF because I rarely find businesses that lend themselves well to a DCF analysis. Exceptions include the shipping trusts and KGT, where revenues are fixed for a long period of time and expenses are modest in relation to revenues.
There may be many ways to adjust DCF for riskier or less stable businesses.
One is to increase the discount rate. Two is to use multiple DCF which are then multiplied by your subjective probabilities (the probabilities should sum to 1). Three, multiply the DCF by a risk discount factor (say 0.8 x DCF value). etc.
Personally, I perferred discounted earnings (DE) approach over discounted cashflow, since there is an academic paper that notes that DE has similar performance as DCF and DE is easier to compute.