Discounted Cash Flow Analysis
Jul 30th, 2007 by Martin Lee
One of my readers, Ken, asked me this question:
Read your blog. Very good- I wonder if you do discounted cash flow analysis for the stocks you value (as opposed to the PE multiples approach).
If you do, then, how do you evaluate a company with decrease in earnings growth in the first year of projection?
Thanks for your input.
I gave Ken a very concise reply:
Try not to sweat the small stuff.
Any discounted cash flow analysis is at best, an estimate.
That is why it is important to factor in a margin of safety into the derived intrinsic value.
It’s better to be approximately right than precisely wrong.
Thanks, Martin! Keep the education coming. Actually, I don’t think the Buffett even does detailed DCF using CAPM and betas. He probably has a cost of capital in his head already, and since he only looks at companies with steady growing earnings, probably doesn’t even have to contend with the issue I raised.
He takes 10 mins to churn out his numbers. :)
You are right. He targets companies with a wide economic moat so the earnings tend to be fairly stable (and increasing).
Anything with unpredicatable earnings is beyond him. :)