The theoretical framework of a DCF analysis is the only rational approach to value an asset, as Buffett has consistently taught. After all, if an asset is not worth the discounted present value of all its future cash flows, what is it worth?

Two problems with DCFs are 1) they give the false impression that they are precise and 2) they can lead you to overvalue the future prospects of a business and overpay for its stock.

Nevertheless, they are still the correct way to think about business valuation.

Within this general framework, you should avoid false precision, focus on those businesses that are within your circle of competence and for which you can make a reasonable assessment of how earnings might look in 5 to 10 years, and then be patient enough for them to trade at attractive prices, such as when they make a 52-week low, before getting serious about making a meaningful purchase.

I disagree with the rational. There are dozens of behavioural studies that show that we are overly optmistic and confident which usually leads to grotesque errors in forecasting, which is the essence of any DCF. In addition to these studies, it has also been shown (Dreman, Montier) that analysts are terrible at forecasting any variable let alone a collection of them (margins, growth, CAPEX) and therefore they usually miss even short term forecats frequently and by a large margin.

Interesting guy. Guess he didn't like the railroad business much.

DCF is the only true way to value a business. I use DCF to value all of my core investments and this has worked out well as I try to be disciplined and unemotional about future projections.

However, guessing what some tech company will earn in 7-10 years is a fool's game.

Which is exactly why Buffett does not buy tech stocks.

If you are a long-term investor who's going to buy a company with an uncertain future, you can still use a conservative DCF and buy at an appropriate discount to protect against the inevitable forecasting errors.

WMT is a nice example of a fairly easy DCF. Assuming a steady state where total s.f. growth is about 1%/year, FCF roughly equals net income. Looking at it like a 100% owner, I use 10% Ke and perpetual FCF growth of roughly 2.5-3% (1.5% pricing, 1.5% unit). Using normalized forward FCF of $4.60 gives me a rough value of $61-$66. A good value buy point is a 20% discount or $49-$52.50. It was recently $52 so there was a good low-risk investment opportunity.

I think Buffett bought WMT in Q3'09 around $50, so he should get roughly 10%+ perpetual IRR from his buy date if my $61-66 current value is correct.

As a public company, WMT can buy back shares which should achieve a reinvestment rate of Ke. This avoids dividend tax leakage or underutilized FCF assuming 100% ownership of a private entity.

In early 2000 when WMT was 50x EPS, anyone using this simple formula would realize that future 10-year returns would almost surely be less than Ke of 10%.

I think most portfolio managers were buying it in early 2000 because it was a good performing large component of the S&P500 so they had to own it. Now WMT may be underowned as most PMs hate owning a "dead money" stock. Is this an opportunity to outsmart the professionals? I think yes.

CM

You are one more proof of the biases I had just mentioned. All, and I mean all DFC users say exactly the same thing . They are the ones that are conservative and disciplined. Which is another evidence of overconfidence. Since if they didnt think they were conservative and disciplined they wouldnt rely on their model and use the DCF tool to make a decision, would they?

It is important to point out that neither Buffett or Munger or anyone at Berkshire do DFC calculations since you brought him up.

You are probably successfull in your investments but my guess is that modelling has little to do with that.

best

DCF : Theoritically correct and practically useless. Love such thing.

I do DCF (using the gurufocus calculator) assuming company will have 0% growth forever. It gives me some sense of the floor.

Batalha,

DCFs are most useful for predictable companies. At the least, I think a DCF helps you avoid bad decisions.

If one was doing a DCF in early 2000 on WMT or any of the high-flier tech stocks and didn't realize that some pretty heroic assumptions were necessary to justify the stock price, one should not be investing.

An analyst friend of mine did a very complex analysis of Webvan back in 2000 and he said the stock was a bargain - I think his assumptions were something like 25% of all Americans would use Webvan as their primary grocer in 10 years. Given most geographies are not logistically suitable plus the competitive issues (Safeway etc.), his assumptions were outlandish but he missed the forest through the trees.

To paraphrase Buffett - "if you need to do a detailed DCF, it's not cheap enough". As I mentioned with WMT, a decent understanding of the competitive advantages and a simple perpetual FCF formula are enough to ballpark it. If I think WMT is worth $60+, anything below $50 is a good investment.

Greg wrote:
"The theoretical framework of a DCF analysis is the only rational approach to value an asset, as Buffett has consistently taught."

I respect your work Greg but this is the first time I disagree with you on both accounts. A DCF style valuation that assumes no growth and accounts for the interest bearing liabilities and excess cash, such as the EPV does, makes more sense to me. Also, I've read multiple times from Munger that in all his years he's never seen Buffett do a DCF. In theory, the DCF makes practical sense. In application, it doesn't because the end result is based on pure assumptions. An EPV, which Greenwald advocates (as well as myself), assumes very little. There is no evidence that Buffett uses a DCF and I personally don't believe he does. There is plenty of evidence he uses, what we call today, the EPV; which Graham created many years ago and taught his students.

"DCF is the only true way to value a business. I use DCF to value all of my core investments..."

Then you must be exclusively a growth investor that invests in businesses that are all similar to one another. The DCF isn't for all businesses.

"I do DCF (using the gurufocus calculator)..."

GuruFocus doesn't have a DCF calculator. They have something they "call" a DCF calculator but it is not a DCF formula. DCF's don't include tangible book to the discounted cash flow for obvious reasons, GuruFocus's calculator does.

I need to study EPV. Any good resources

Am I the only one who does DCF assuming 0% growth forever?

"DCF's don't including adding tangible book to the discounted cash flow for obvious reasons, GuruFocus's calculator does." - Jhodges

thanks for pointing that out. I missed that. What are the pros and cons of Gurufocus approach.

"If I think WMT is worth $60+, anything below $50 is a good investment."

You don't use Graham's margin of safety?

"I need to study EPV. Any good resources"

The book that is discussed in the article takes you through the EPV backwards and forwards and the author (Bruce Greenwald) is hands down the best educator on the planet. So much so that he teaches the same course and at the same college (Columbia) that Graham did. Also the same course Greenblatt taught when he was the professor at Columbia.


"Am I the only one who does DCF assuming 0% growth forever?"

No.

"DCF's don't including adding tangible book to the discounted cash flow for obvious reasons, GuruFocus's calculator does." - Jhodges

"thanks for pointing that out. I missed that. What are the pros and cons of Gurufocus approach."

I can only think of a con: he doesn't know what he's doing in regards to the DCF. If you want to learn DCF then the best way to do so is by researching John Burr Williams, the man that created it.

Good discussion. I tend to use inverse DCF, pointed out in todays article on Margin of Safety.
http://www.gurufocus.com/news/138188/margin-of-safety-valuation-discussion

I use a standard 12% discount rate (I don't use CAPM), a rough estimate of normalized FCF/ current FCF, and then instead of predicting the FCF growth rate, I enter a growth rate such that intrinsic value = current stock price. If I am required to enter 10%+ FCF growth rate for 10 years, that tells me its not a clear bargain. Often times, I find stocks where 0% or 2% FCF growth rate, justifies the current stock price. That tells me that there are very low expectations on the stock.

To round off, I always check if 0% growth rate is used, what would the stock price be....I tend to use this as the floor.

I account for net cash in my share price calculations.

Net Cash as in Cash - Total Liabilities? I would think that would most often produce a negative to just about all companies with the exception of net-net's. In those cases, no DCF would be required to understand the obvious.

Net Cash = Cash + ST Investments - ST debt - LT Debt.

That's close to what I described with the exception that you're including short term marketable securities. Generally speaking, ST Debt (current debt) + LT Debt = Total Liabilities. The end result, as I previously stated, would produce little, if any, positive net cash inclusions to the DCF unless the companies being analyzed were net-net's. A DCF applied to a net-net is a bit of an oxymoron in my opinion.

Are you saying there are no other liabilities on the balance sheet other than debt ? Well, anyways i prefer cash rich companies where Debt is negligible. So, CATO has $260 million excess cash if you will. That's $9 a share in a $28 share price. So, After the DCF spits out all the Cash Flows, Terminal Values and discount by the 12% discount rate, you arrive at EV. Then I add the excess cash to arrive at market cap and divide by share count.

"Are you saying there are no other liabilities on the balance sheet other than debt?"

No, that's why I prefaced my comment with "generally". But, debt is most often the main source of liabilities.

"Well, anyways i prefer cash rich companies where Debt is negligible."

So do I if they are managing their working capital needs for growth purposes rather than storing up and producing no growth which I've found often to be the case.

"So, CATO has $260 million excess cash if you will. That's $9 a share in a $28 share price. So, After the DCF spits out all the Cash Flows, Terminal Values and discount by the 12% discount rate, you arrive at EV. Then I add the excess cash to arrive at market cap and divide by share count."

"Excess cash" and "Net Cash" are two completely opposite accounting terms.

Ok. excess cash then ;)

"Ok. excess cash then ;)"

Then your excess cash calculation is incorrect. Excess cash is the amount of cash you have left over after you can fund your current liability needs. Current Liabilities is defined as obligations the company must deal with within one year. Long Term Liabilities is defined as obligations the company must deal with in excess of one year. Obviously, it would make no sense to account for long term obligations in which the company doesn't have to deal with until 10 years from now if your long term horizon for investing is only 3 years out - for example.

To be conservative, i want to consider all LT debt.

"To be conservative, i want to consider all LT debt"

With all do respect, and I apologize in advance because this sounds worse than I mean it but I currently lack softer words, you're not being conservative - you're being lazy.

You dont have to apologize.

Do you use DCF at all? Give us an example with EPV..it will be good to learn.

I look at DCF more so for entertainment purposes but never include its information in my decision making process. To me, a DCF is equivalent to looking at the pictures of a home decor magazine and dreaming of having homes one will never have.

The EPV is as much not a model as it is a model. It is too indepth to provide any detail of it here and I wouldn't want to cause any confusion to the subject. I rather recommend anyone interested to purchase Bruce Greenwald's book mentioned in the above article.

In short, there are multiple levels of the EPV. 1) it's a one year DCF that assumes no growth, 2) it accounts for excess cash and interest bearing liabilities. 3) it accounts for an amount needed to keep the doors open in a worst case scenario (usually 2% of revenue). 4) it compares this information to a proper asset valuation (not book) to determine if a moat exists. 5) and about 100 other things that if I keep rambling - I might as well write an article that would be counterproductive since nothing, in my opinion, can top what Greenwald has already written; possibly other than where it originated from - Graham in Security Analysis.

@Batalha: Then what do Buffett and Munger use? Nonsense, of course they use DCF valuation. They may not set up a detailed spreadsheet or use the CAPM to derive their cost of capital.
But the essense of DCF is: The value of a company is the present value of its cash flows.
That's exactly what Buffett does and it's what everybody else does. There is no other way. Multiples, p/b are all just DCFs with certain simplified assumptions.

I have listened to a Buffett lecture and read, like everyone else, a lot about him and Munger. They have said over and over again that they do not make any kind of projections. Alice Schroeder, who wrote his book, also said that in years discussing investments with WB ne never once walk her through any kind of DFC approach for a business.

What he does use is a return that he wants to buy. That return is something like an EV/ EBIT of 6, which equates to more than 15% in yield. Since he buys companies with high ROIC and some growth he is actually looking for an yield of something like 15% to 20%.

Also, he definetely uses Net Asset Value, buying things cheaper than their replacemente value. He did that with PetroChina. Again, Graham and subsequently Greenwald also incorporate that into their framework.

JHodges 72: "Then you must be exclusively a growth investor that invests in businesses that are all similar to one another. The DCF isn't for all businesses."

As I mentioned, DCFs are great for pretty predictable businesses with moats and not useful for companies (tech etc.) where terminal values are very uncertain.

How can you assume a company never grows FCF? There are inflation-related price increases, population growth, new products etc. Why zero growth, why not -1%? You use zero for absolutely no reason except it requires no thought whatsoever.

I agree that DCFs are dangerous in the hands of unthoughtful people. However, if you are rational and have done your homework and understand company/industry risks, operating leverage, market growth, returns on reinvested capital etc, your DCF will be much better than your typical bozo who looks at PEG or P/E. A DCF also assumes you are looking at an investment horizon of about 5 years.

Buffett does not do detailed DCF analysis. He does more back-of-the-envelope numbers as I did with WMT using his understanding of the competitive and economic characteristics of the business.

Here is another example using my biggest holding Philip Morris (PM):

I use pretty conservative numbers that are lower than mgmt's long-term projections. I assume -1% long-term unit growth as PM's move into emerging markets almost offsets declines in developed non-U.S. markets. Net price increases are a conservative 3.5%/year and then you get a little margin improvement so conservative FCF growth is about 3%. I exclude the benefit of issuing debt to buy back shares etc. which could provide more upside.

As a 100% owner, I look at forward FCF/share of $4.85. Using FCF/(Ke-g) with Ke being 10% and perpetual FCF growth of 3%, I get $69/share, which, not surprisingly, is today's exact price.

Assuming zero makes NO sense. If I used your method, I would value PM at $48.50.

Do you think Buffett could justify WMT when he bought it at $50 in 2009? Assuming normalized FCF of $4 would suggest a value of $40 assuming Ke = 10%. I guess he overpaid by 25%.

"How can you assume a company never grows FCF?"

I "assume" nothing when it comes to my money and how I deal with it. To assume a company never grows or to assume a company always grows both have commonality in that they are both nothing more than an "assumption". I don't place bets on assumptions, I place bets on sure things.

"There are inflation-related price increases, population growth, new products etc. Why zero growth, why not -1%? You use zero for absolutely no reason except it requires no thought whatsoever."

You're not understanding the point of no growth. Pick up a copy of the book and learn what is meant by it (which has nothing to do with "growth"). Ben Graham created the theory. He was not known to be someone of "no thought whatsoever". A "thoughtful" person would invest some time in finding out what "zero growth" is in relation to the EPV before he spats off the assumption that "it requires no thought whatsoever". By making such an adolescent comment, you've actually revealed yourself to be a presumptuous person that relies on pure speculation in order to derive an opinion about a subject matter than you don't have any idea of.

"A DCF also assumes you are looking at an investment horizon of about 5 years."

A DCF can have a time horizon of any amount of time one assumes. 5 years is not the "standard".

"Assuming zero makes NO sense. If I used your method, I would value PM at $48.50."

Again, you're not understanding what the term "no growth" means. Buy the book. I'm picky on who I teach. I'm not interested in teaching here.

"Obviously, Buffett estimates FCF growth when doing his mental DCF."

No, it's not obvious and you're assuming Buffett does a DCF at all - which I'm quite certain beyond a reasonable doubt that he does not. His teacher, Ben Graham, never. His niece, who published a book in respect to him, said he never, his biography mentions that he doesn't, and his best friend and business partner says he doesn't. Somehow however you've got it in your mind that you know which technique he uses even better than the closest people to him who all say he doesn't. From Graham, he learned how to value a business. From Fisher, he learned how to investigate an enterprises management. Graham laughed at the notion of assuming cash flows into the future. That's why he created his own formula called the "Graham Formula" which uses a "no growth" scenario for valuation.

Lastly, your quotation of a famous remark Buffett said has nothing to do with anything I've said nor does it prove or disprove anything I've said because the subject matter and context of which he used that statement had nothing to do with using a valuation method that assumes all companies grow 5, 10, 20 years into the future and that anyone could possibly foretell what the growth rate of such companies will be that far in the future.

CM

Only when ROIC is higher than cost of capital it adds value. So, in many instances, not only companies that grow will not generate value but they can also destroy it.

By zero growth, he means that you assume a steady state version of the company. Hence, it doesnt need additional capital but Maintenance Capex which would refill its asset base to the point it was at the beggining of the year. Also, you are going to use a normilized version of its past history.

We obviously have different opinions.

My disciplined method has provided good results so I'm going to stick with it.

If one know tons about an industry and company, this knowledge is useful in helping determine FCF growth rates. Why accumulate knowledge when you can't utilize it to your advantage?

Buffett obviously uses a back-of-the envelope DCF and he plugs into his vast experience in determining the sustainability and growth of the FCF inputs. But maybe you can "teach" him a few things.

Batalha.

I understand your point about FCF reinvestment. WMT is a great example as it can reinvest in international or domestic locations that meet the ROIC hurdle. All of the other FCF can be used for dividends and share buybacks.

I also like PM as there is very little capex needed to get that 3% FCF growth. Plus they can use excess FCF share buybacks as prices that should be greater than Ke.

Another one of my top holdings is CCI. Very different story. There are lots of assets but new investments yield extremely high ROIC and there will ample capex opportunities for the next 5-10 years so I used a 8 year DCF model.

Bottom line is a company is worth the present value of future FCF. How will you know that value if you can't forecast revenue growth, margins, reinvestment rates, leverage etc. PM and WMT are simple enough for back-of-the-envelope calculations but many companies like CCI are not.

"My disciplined method has provided good results so I'm going to stick with it."

As long as you're happy with what you're doing stick with it. No argument there from me.


"If one know tons about an industry and company, this knowledge is useful in helping determine FCF growth rates."

I disagree in that in all the history of the world, no fortune teller has ever been able to operate to any meaningful rate of success. To this day, the crystal ball is still not a big seller due to its inherent flaws.

"Why accumulate knowledge when you can't utilize it to your advantage?"

The issue between your valuation belief and mine has nothing to do with the accumulation of information. It has to do with my valuation values a business based on what it's worth today with no assumptions made about it, only the facts. Your technique values a business based on what you assume will happen in the future to that business. My research methods are exhaustive. Trust me when I say, I know everything about the businesses I invest in from the CEO to the office letter courier.

"Buffett obviously uses a back-of-the envelope DCF and he plugs into his vast experience in determining the sustainability and growth of the FCF inputs. But maybe you can "teach" him a few things."

It's not so obvious to Charlie Munger who states that he doesn't use a DCF. Thinking about the future (which Buffett does) and relying on the future (which Buffett doesn't) are two completely different realities. The DCF relies on future assumptions, Buffett does not.

Jhodges 72,

It is hard to tell future FCF growth rates? Yes it is.

Which is why Buffett buys predictable companies like PG, WMT, KO etc.

A back-of-the-envelope DCF is easy to do with these type of companies as I have shown with PM and WMT..

Got it yet?

"It's not so obvious to Charlie Munger who states that he doesn't use a DCF. Thinking about the future (which Buffett does) and relying on the future (which Buffett doesn't) are two completely different realities. The DCF relies on future assumptions, Buffett does not."

Seriously?

So Buffett thinks about KO selling to more people around the world yet does not rely on that assumption in his valuation?

If Buffett thinks KO will grow FCF at 4% for the next 20 years, that will imply a very different value than if he thought it could grow at 5.5%. It's simple math and Buffett can do it on a napkin or in his head.

"Bottom line is a company is worth the present value of future FCF. How will you know that value if you can't forecast revenue growth, margins, reinvestment rates, leverage etc. PM and WMT are simple enough for back-of-the-envelope calculations but many companies like CCI are not."

There's no question to me that you honestly believe that but unfortunately it isn't a logical argument. Assuming you're correct in that a company is worth the present value of all future cash flows discounted to the present, then there's be little opportunities investing in Net Net Working Capital opportunities, Bankruptcies, or Turnarounds which is a process that first made Buffett wealthy.

"It's not so obvious to Charlie Munger who states that he doesn't use a DCF. Thinking about the future (which Buffett does) and relying on the future (which Buffett doesn't) are two completely different realities. The DCF relies on future assumptions, Buffett does not."


Seriously?"

Yes, Munger really has said that multiple times.

"So Buffett thinks about KO selling to more people around the world yet does not rely on that assumption in his valuation?"

There are obvious cases in which making an assumption whether a company will be around in the next 10 years is pretty easy to make. KO is one such company. JNJ would be another. A small, mid, and even most large cap companies isn't the anomalies that KO and JNJ are.

"It is hard to tell future FCF growth rates? Yes it is.

Which is why Buffett buys predictable companies like PG, WMT, KO etc.

A back-of-the-envelope DCF is easy to do with these type of companies as I have shown with PM and WMT..

Got it yet?"

Young man, I got it years ago. The last 5 years I've produced an averaged annual return on my total portfolio of 118% per year. I got it good. :)

CM

Either you are blessed or like I previously said, your results have nothing to do with your models.

Forecasting is pure folly. Period.

Value an Oil company for me. Well, give me the future price of a barrel of oil for the next 50 years and I will value for you using a DCF model. This is, in a nutshell, how silly DCF models are. People can't even predict 12 months into the future.

Back in 2001, Oil was under 20 a barrel, which was lower then Iraq invasion of Kuwait in the early 90s. Nobody wanted oil, it was stagnant for almost 20 years. Nobody, ex-antes, predicted that Oil would have soared the way it did. Nevertheless, it is always obvious after the fact.

Now if you want to predict not only price, but quantity, the cost of capital, labor, CAPEX and hundreds of other variables that go into a DCF model, good luck.

Back in 08 crisis many large cap companies made from industry insiders were caught short on their own predictions from the very business they were in. Xstrata, Mittal, Financial Services and many others simply didn't see what was coming. Even GE nedeed government capital for christ sake.

But anyway, good luck.

Batalha obviously "got it" too.

Yes, turnarounds are profitable but they can also be value traps. You need to value assets or figure out FCFs if the turnaround is successful.

I am talking about your typical investment. It is worth the PV of free cash flows. PERIOD. The market is manic so prices will not always reflect this value but Buffett knows the approximate DCF value and waits until Mr. Market gives him a bargain.

This is Finance 101.

Again, a napkin is all that is needed for most of the companies Buffett owns.

Wow - 118% per year - you must be the best hedge fund manager EVER if you can do that without penny stocks. How can I invest with you?

batalha.

So how do you value a company? Throw a dart at a page full of numbers?

Buffett obviously thought oil prices where going up when he bought COP in 2008. He was too optimistic as he admitted he overpaid. But he obviously made an assumption on oil prices.

That is why I don't invest in gold, oil or materials as I do not understand the supply/demand enough to have any confidence.

Like Buffett, I stick within my circle of competence and it has served me well.

Nope.

Firstly, I try to come up with a reasonable assessment of the value of the assets. Cash is Cash, receivable at a discount, Net PPE that might have an adjustment and son on. If I cant value, it is a write-off (intangibles for instance). Please note that there is no forecast involved.

Seconly, like Hodges, I do an EPV calculation where there is no projection involved either. It a mechanical process which makes it mostly unbiased.

Finally, I add growth.

This is the process that is described in the book and that I try, my best, to follow.

Regarding Bufftett, EXACLTY my point! when he did try to come up with an assumption about future oil prices he gets hurt. Thanks for the example!

So you admit Buffett uses forecasting and projections?

If you are valuing an ongoing entity, FCF is the primary driver of value plus/minus excess cash and assets/liabilities. If you invest in bankruptcies etc. assets matter most obviously.

I invest for 5+ year time horizons so I use DCF. Buffett also invests over multi-year periods so it is not surprising that he also uses a back-of-the-envelope DCF.

Yes, Buffett loves DCF because he learned from his professor Graham that it is the fundamental tool to value a business.

He also is very careful about CAPM, sharpe ratio and other finance tools.

Finally, he reads every sell side report out there.

Cheers

"Yes, turnarounds are profitable".

Most often they are not, it's why they're called turnarounds. Because once they were not and a shake up occurred to bring them back to profitability. You certainly wouldn't make assumptions 10 years out regard the cash flow of a business who has experienced only one year of profitability right after it came out of the red. That would be foolish. Therefore, you value the assets and the current cash flow at no growth and see if today's market price is cheap in relation to its economic value or its replacement value or what have you. Not its discounted cash flow 10 years out.

"I am talking about your typical investment. It is worth the PV of free cash flows. PERIOD. The market is manic so prices will not always reflect this value but Buffett knows the approximate DCF value and waits until Mr. Market gives him a bargain."

If you're talking about my typical investment, they are in the area of M&A, Net-Net's, Turnarounds, and Bankruptcies. Together as a group they are called Special Situations. It is also the playing field Mr. Buffett, whom you seem to think uses the DCF, played in for the first 20 years of his investing career until he became so big that he no longer that produce a meaningful return in relation to his entire wealth. Investing in $50 Million cap. companies when you have $1 Billion in capital affects very little of the $1 Billion.

"This is finance 101."

:) no comment. I'll leave you to figure out that through trial and error.

"Again, a napkin is all that is needed for most of the companies Buffett owns."

I don't argue that fact. What I argue is that knowing all that is required is a napkin, why do you keep advocating the use of a DCF? I'm quite certain you don't do your DCF long handed and an ordinary napkin does not produce the surface space required to do a projection 5, 10, 20 years out. My calculation can be done and is done most often in my head.

"Wow - 118% per year - you must be the best hedge fund manager EVER if you can do that without penny stocks. How can I invest with you?"

The DCF, which requires assumptions, is the perfect tool for you because you have a lot in common with its mechanics...you both "assume" too much. Now, you've assumed I operate a hedge fund. Many well known investors are more than aware of my annual returns regardless if you are or not and yes, I do invest in many micro cap stocks just as Buffett did himself for many years.

Forgot, he uses Markowitz for portofolio construction as well!

"Like Buffett, I stick within my circle of competence and it has served me well."

Trying to find commonality by trying to link Buffett's namesake with your own is not benefiting your case. It seems to me that your circle of competence is lacking and that you're very new to your research.

No, I use my academic (MBA) and valuation work when I advised private equity firms on potential targets.

Using private equity methods and buying at a value less than private market value works over all cycles.

"If you are valuing an ongoing entity, FCF is the primary driver of value plus/minus excess cash and assets/liabilities. If you invest in bankruptcies etc. assets matter most obviously."

If you are adding the assets, liabilities, and excess cash to a DCF - you are not doing a DCF as created by John Burr Williams or any other well known proponent of the DCF that I know of. That's an amateur mistake.


"Buffett also invests over multi-year periods so it is not surprising that he also uses a back-of-the-envelope DCF."

I invest for multi-year periods. Ben Graham, who taught Warren Buffett how to value a business, invested for multi-year periods. Walter Schloss, who worked with Buffett at Graham-Newman, invested for multi-year periods. None of the above use a DCF and neither does Warren Buffett. You simply don't know what you're talking about because you haven't collected enough experience. I'll give you one hint: if you find that you are using the same techniques to valuing a business that the majority uses, you are doing it wrong because the majority of investors lose money. The majority who invest absolutely use the DCF as their main tool for valuation. It matters not whether you currently do or not because trust me, you will when you are able to amass more than a year or two of investing practice.

"No, I use my academic (MBA) and valuation work when I advised private equity firms on potential targets."

Firstly, Bullshit. I can spot it a mile away. No one who adds back the assets of a business to a DCF, which already represents the assets of a business and which uses FCF which includes the assets of the business (changes in working capital), works for a private equity firm or has an MBA.

The MBA is a liability for many more than it is of value. Like a doctor, it creates the false sensation of an above intelligence. Walter Schloss never attended a finance course in his life yet many institutions teach the financial techniques that Walter Schloss employed. An MBA, although you may feel entitlement because of it, is of no use to me.

And that's coming from a man whom also has an MBA :)

No, I use my academic (MBA) and valuation work when I advised private equity firms on potential targets.

Cool, are you aware that the mean return of the PE industry in the states is lower than that of the S&P over the long run?

Please, do not brag about your MBA.

-

Cm,

I was trying to work the PM example you mentioned. I had to use 6.5% FCF growth rate for the next 10 years followed by 3% terminal growth to justify its current stock price. Using the 3% rate you mentioned, I came up with $58. I used a 9% discount rate ( much lower than my usual 12% hurdle).

PM seems fairly valued at best.....

Anyone want to post an EPV valuation for PM ?

"Anyone want to post an EPV valuation for PM ?"

Not really because it would require me to know the business and I don't. I'll lend an EPV assumption however. Owner Earnings / beta free WACC + Excess Cash - Interest Bearing Liabilities, assuming WACC is 5% (which is probably realistic) = you're looking at about a $58 valuation with the EPV.

thanks!

Jhodges - I'll appreciate, carefully listen to and follow any reading (or other) recommendations you have.

Also, do you just use public filings to learn the business in detail, or other means? Thank you.

"Firstly, Bullshit. I can spot it a mile away. No one who adds back the assets of a business to a DCF, which already represents the assets of a business and which uses FCF which includes the assets of the business (changes in working capital), works for a private equity firm or has an MBA."

Notice that I said "excess" cash and assets/liabilities where they are not required for business operations.

These include extra land, some equity investments etc. as well as closure liabilities for landfills etc. that do not show up on the CF statement.

"Jhodges - I'll appreciate, carefully listen to and follow any reading (or other) recommendations you have.

Also, do you just use public filings to learn the business in detail, or other means? Thank you."

Books on which subject matter specifically would you like a recommendation too? All SEC filings, especially the footnotes, are of importance. Going back several years. Trade magazines - which most of them are accessible online. For example, you're interest in a company who does business in debt collections - you search for debt collections industry trade magazines. I also read the direct competitors SEC filings. Often times, they talk about the business you're interested in. Concerning bankruptcies, which I love...bankruptcies are most often overlooked because when a public company files for bankruptcy, their SEC filings immediately cease. You have to go to the PACER site the government provides and pay a fee to review the court filings. Most people don't do it because they don't know how to do it and they're lazy. No investment is safer to invest in than a bankruptcy because the court has to rule on EVERYTHING. If a company, in bankruptcy, wants to sell an asset - they can't without court approval. If a company, in bankruptcy, wants to hire so-and-so, they can't without the court approval. None of this information is available through SEC filings therefore it never receives news worthiness. Find out what the majority does and do something different. The majority doesn't wade through court filings. The majority doesn't read SEC filings....they skim the financial section only. Read the "footnotes" because the company publishes things in the footnotes that they are forced to publish but don't want to such as "related party transactions" or "changes in accounting policy". This is the "art" to investing...not running a DCF. A DCF has no idea if the mother of the CEO took a 20 year $3 M loan from the company at 0% interest.

Let me know specifically which subject matter you would like to learn more about and I'd be happy to recommend a book if I'm familiar with the subject matter.

CM1750,

I honestly don't have anymore time available to allocate towards you. Good luck.

P.S. Cash is already accounted for in FCF under the accounting term "changes in working capital". Therefore, again, you are double counting and simply don't understand basic accounting protocol. Therefore, if I continued "arguing" with you it would be the equivalent of throwing good money at bad. I have no interest in doing so as my point has been well made and any logical person that simply "thinks" will see its relevance.

Like I'm interested in your crappy bankruptcy ideas.

If you don't even realize that the PV of FCFs is the value of an ongoing business, I couldn't care less what you have to say.

must be the most discussed thread ever:)

"Like I care about your crappy bankruptcy ideas.

If you don't realize that PV of FCFs is the value of an ongoing business, I could care less what you have to say."

My bankruptcy conversation had nothing to do with you. Once you take the focus off you, you may be able to learn something. Not all business are worth its future cash flow. Some businesses are worth just what they currently have. A liquidation situation, who produces no cash flow obviously otherwise they wouldn't be liquidating itself, is worth their equity value in a fire sale situation and has absolutely nothing to do with cash flow...especially if their cash flow is negative which made the company decide to liquidate to begin with (which is 99% of the cases). You, young man, have a more to learn than your ego will allow you to. All the best.

Jhodges72,

Sorry, but change in cash is not included in change in working capital - it is the result.

Maybe you should have learned basic finance.

The fact is that if AAPL has $50/share in excess cash, only the interest on that beginning cash is in the FCF. If you don't add excess cash to your DCF, you are undervaluing. It's normally just in the net debt number when adjusting the discounted FCFs.

Yeah, I can learn a lot from a guy like you.

Maybe you should read a basic finance book instead of scrounging in the footnotes of some bankrupt company's filings.

Sorry to seem like a jerk, but you know-nothing "investors" make me cringe.

Maybe you should read the Steve Romnick interview. You might learn basic valuation for an ongoing company.

"Sorry, but change in cash is not included in change in working capital - it is the result.

Maybe you should have learned basic finance."

And again, you're wrong. Working Capital is defined as Current Assets. Example: The long handed name for "net-net" stocks is called Net Net Working Capital. The calculation is Working Capital minus Total Liabilities. In the old days, before you were born, Current Assets on the balance sheet was called "Working Capital". It includes Cash.

Again, you simply don't know what you're talking about and your "ego is writing check your" brain can't cash.

"Yeah, I can learn a lot from a guy like you."

No, I doubt you can.


"Maybe you should read a basic finance book instead of scrounging in the footnotes of some bankrupt company's filings"

I read many finance books. Have written one too. :)

"Sorry to seem like a jerk, but you know-nothing "investors" make me cringe."

Then simply be done with the debate because I'm exhausted and bored of you as well and find you to be of a child-like quality.

Yeah, nice try - change in net working capital (inv, A/R, A/P etc.) in CF from operations does not include change in cash.

Maybe you should learn the basics of CF statement analysis.

I love people who talk big about their "expertise" yet know less than a first year finance undergrad.

"Yeah, nice try - change in net working capital (inv, A/R, A/P etc.) in CF from operations does not include change in cash.
Maybe you should learn the basics of CF statement analysis."

You bore me and frankly piss me off as you'd argue with Warren Buffett himself - I'm convinced of it, good night.

"I love people who talk big about their "expertise" yet know less than a first year finance undergrad."

And I love how some 20 +/- year old's enroll in a finance class with less than $5,000 to their name and go online arguing with people old enough to be their father and already retired. Seriously young man, your dick isn't as big as mine. Go away.

"The fact is that if AAPL has $50/share in excess cash, only the interest on that beginning cash is in the FCF. If you don't add excess cash to your DCF, you are undervaluing. It's normally just in the net debt number when adjusting the discounted FCFs."

AAPL has only approximately $28 in cash per share without accounting for ANYTHING, therefore it's impossible that they have $50 per share in "excess cash" since no number, in regards to cash, is greater than cash divided by total shares outstanding. You seem to bring up the conversation of individual companies for confusion purposes, however, you've been dead wrong on every account. I'm beginning to wonder if you can even add basic math.

For what it's worth, here is my newbie opinion. I'm a total newbie and am not a true value investor (I'm more macro-oriented but do lean towards value investing) although I do think about the issues that have been discussed.

First of all, I think people are talking about totally different things here. My view is that special situations are totally different from a typical, going-concern, investment. Trying to use a method like DCF, or my favourite, multiples (P/E, P/FCF), for special situations probably won't yield any meaningful result. Let's ignore special situations and just look at a "typical" company.

I am not a fan of DCF--initially started using it but came to the conclusion that it is near-useless since it is so sensitive to inputs--but I do use a method similar to a DCF. I just use a P/E or P/FCF multiple--or at least that's what I'm focusing on these days.

I don't like DCF but I think CM1750 is correct in saying that the future growth needs to be factored in somehow. I don't have any proof but I'm pretty certain that Warren Buffett (and other Buffett-type value superinvestors) attempt to "predict" the future (the only exception would be special situations such as distressed firms and the like, for which they probably rely more on the balance sheet; Graham-type value investors like Walter Schloss likely don't forecast growth since they are balance-sheet-oriented and tend to focus on net-nets and investments like that).

The example cited above of Buffett being off with his oil and natural gas forecast and ending up with a poor ConocoPhillips investment isn't isolated. Even companies like Coca-Cola require a forecast of their future. Or even look at a recent investment like Burlington Northern Santa Fe. I highly doubt Buffett would have made that investment without forecasting the future in some manner. In fact, the bearish cases for BNSF (such as those from Bruce Greenwald) and the bullish case (such as those from Buffet and his shareholders) likely centers on the future growth for the railway.

My feeling is that Buffett probably spent a lot of time forecasting the future for almost all his non-special-situations/non-distressed/non-special-terms investments.

When it comes to forecasting, the difference, though, between value investors and growth investors--some say they are all the same and think there is only one--is that value investors are very conservative with their forecasts, whereas growth investors tend not to be.

As for EPV, I am not too familiar with it but its success will also come down to "forecasting" or understanding the future. EPV relies heavily on present earnings that is assumed to be fairly sustainable. Yet, as anyone who criticizes DCF knows, figuring out what is a sustainable earning is probably the most difficult task. Just ask all those renowed value investors who invested in financials 5 years ago--or even now.

Very few in the value investing community seem to admit it but as soon as you move from Graham-type investing to Buffett-type investing, the key determinant of success is the future.

"My view is that special situations are totally different from a typical, going-concern, investment. Trying to use a method like DCF, or my favourite, multiples (P/E, P/FCF), for special situations probably won't yield any meaningful result."

They are but the young man argued that all businesses value is a result of their future cash flows discounted back to the present therefore a debate took place.

"I am not a fan of DCF--initially started using it but came to the conclusion that it is near-useless since it is so sensitive to inputs...I don't like DCF but I think CM1750 is correct in saying that the future growth needs to be factored in somehow."

You've just contradicted yourself with these two statements.

"I don't have any proof but I'm pretty certain that Warren Buffett (and other Buffett-type value superinvestors) attempt to "predict" the future (the only exception would be special situations such as distressed firms and the like, for which they probably rely more on the balance sheet; Graham-type value investors like Walter Schloss likely don't forecast growth since they are balance-sheet-oriented and tend to focus on net-nets and investments like that)."

Warren deals with businesses that are highly predictable and forms an opinion whether he believes a particular company will continue to grow. It doesn't take a rocket scientist to come to the conclusion that as long as the world keeps populating, Coca-Cola will stay in business. However, I don't believe that he actually factors a growth percentage and include that in his valuation. I believe he is only aware of it.

"Even companies like Coca-Cola require a forecast of their future."

I believe one can simply look at coke without the need of detail analysis and determine if it is underpriced or overpriced within approximately 5 minutes. No DCF required.

"Or even look at a recent investment like Burlington Northern Santa Fe. I highly doubt Buffett would have made that investment without forecasting the future in some manner."

I believe the obvious was forecasted in that as the oil reserves deplete, a cheaper means of transportation is needed. The fact that a railroad produces the cheapest COGS is another no-brainer.

"In fact, the bearish cases for BNSF (such as those from Bruce Greenwald) and the bullish case (such as those from Buffet and his shareholders) likely centers on the future growth for the railway."

I've read Greenwald's argument. It had nothing to do with the future.

"My feeling is that Buffett probably spent a lot of time forecasting the future for almost all his non-special-situations/non-distressed/non-special-terms investments."

And I believe Buffett "thought" about the future with no forecasting involved.

"As for EPV, I am not too familiar with it but its success will also come down to "forecasting" or understanding the future."

Most people haven't heard of EPV because most people, although talk about Graham, haven't read his works. EPV has been around since the 1930's. It's as old as the DCF. Unfortunately for many, the concept makes one think and there aren't many people willing to do that - therefore, few still to this day have heard of it.

"EPV relies heavily on present earnings that is assumed to be fairly sustainable."

EPV does not forecast. Yes, it takes present earnings and answers the simple question "is the business undervalued or overvalued TODAY?"

"Yet, as anyone who criticizes DCF knows, figuring out what is a sustainable earning is probably the most difficult task. Just ask all those renowed value investors who invested in financials 5 years ago--or even now."

Yet you argued earlier that growth should be accounted for. It seems as though you are being pulled in opposite directions at the same time and are not quite sure what you think. Just a personal observation.

"Very few in the value investing community seem to admit it but as soon as you move from Graham-type investing to Buffett-type investing, the key determinant of success is the future."

I don't argue that one shouldn't think about the future. I argue that one shouldn't rely on it and use the "assumption" in order to establish a fact. Why doesn't a court convict people based on what they "think" happened?

Jhodges,

I don't know if I have enough experience to dabble in bankruptcies/reorgs, but one area that really interests me is spinoffs.

Any ideas/sources/books on that? My problem is lack of initial information on the spinoff. One issue I am looking at now is HII - Huntington Ingalls, which Northrop Grummann just spun off not too long ago. Still not sure about it, probably due to lack of knowledge on where to find info. PM, in its day, was the most ridiculously underpriced spinoff ever, IMHO - I should have bought much more than I did.

Doc,

My friend, Jae Jun, over at oldschoolvalue.com has published articles concerning spinoffs. I recommend you to research his site.

Thank you Jhodges. I also came to very similar conclusions some time back.

What you said makes sense intuitively just like Value investing does.

I will study Greenwald and EPV more and also Whitman's style Balance sheet investing.

Sivaram: "I am not a fan of DCF--initially started using it but came to the conclusion that it is near-useless since it is so sensitive to inputs...I don't like DCF but I think CM1750 is correct in saying that the future growth needs to be factored in somehow."

JHODGES72: "You've just contradicted yourself with these two statements."


I don't think it is as contradictory as it seems. The flaw with DCF is that it is very sensitive to inputs. Even a 0.5% change in discount rate or growth rate can result in wildly different results. That flaw isn't just related to forecasting the future.

The comment about factoring in the future applies to any method. That is not a flaw with DCF alone since I am saying that should be considered for non-DCF methods as well.

JHODGES72: "Warren deals with businesses that are highly predictable and forms an opinion whether he believes a particular company will continue to grow. It doesn't take a rocket scientist to come to the conclusion that as long as the world keeps populating, Coca-Cola will stay in business."

I think the vast majority of people will agree with what you are saying; but I'm going to take a minority view and disagree with the generally-held view.

A lot of what Warren Buffett invests in only looks predictable and a "no brainer" in hindsight! How many people--not just anyone but value investors who act and think like Buffett--would have considered Coca-Cola to be a worthy investment in 1987? Same thing with, say, American Express, Washington Post, PetroChina or ConocoPhillips or Kraft.

If we stick to Coca-Cola, I personally don't think it is as sustainable and obvious of a pick (assuming price was reasonable) as almost every value investor assumes. How do you know Coca-Cola, which largely produces unhealthy, sugary, drinks won't start deteriorating if consumers move towards more healthy drinks?

To see what I mean by the non-obvious-nature, consider your next comment about Burlington Northern Santa Fe:

JHODGES72: "I believe the obvious was forecasted in that as the oil reserves deplete, a cheaper means of transportation is needed. The fact that a railroad produces the cheapest COGS is another no-brainer."

This is a good example of how our views diverge. To me, BNSF is not an obvious pick. In fact, I don't take anything you perceive as inevitable to be the case. Perhaps it's because I'm bearish on commodities and China, but whatever it is, I have no faith that depleting oil reserves are going to result in a shift to rail.

You may not realize it but you are making a major forecast on the future of oil prices, and consequently the impact on rail transporation. Since you view the oil scenario as inevitable you believe it is a no-brainer, but since I'm bearish on oil and believe it may be unsustanable (the prices that is), this is not obvious at all. If anything, this is a macro call.

JHODGES72: "I've read Greenwald's argument. It had nothing to do with the future."

Actually, Greenwald's bearish view of BNSF has everything to do with the future. Greenwald, like me, was arguing that Buffett is betting on a bullish oil forecast:

Greenwald: "The other thing is that if you try to calculate sustainable earnings, you have to cope with the fact that earnings are up enormously since 2003, when oil went up. There is a simple calculation you can do, which compares the cost-per-ton-mile for freight for a truck versus a railroad. If you build the increase in the price of diesel fuel into the post-2003 experience, when revenues suddenly start to grow, what you see is that the entire growth of the revenue is accounted for by the energy advantage that the railroads have and therefore how much business they can capture from the truckers, and how much pricing they can get because the competition is now more expensive.

There is nothing special about the railroads. It’s entirely an energy play.

... It looked to us like an oil play. "

(source: Advisor Perspectives interview)

So, Buffett's biggest bet (at least in terms of dollars) has a lot to do with forecasting the future.

Anyway, the point is not to get into the BNSF details, but the fact that you perceive this as sustainable and obvious, whereas others like me don't. In a similar manner, most of the investments by the modern Buffett is not what it seems like.

JHODGES72: "EPV does not forecast. Yes, it takes present earnings and answers the simple question "is the business undervalued or overvalued TODAY?""

Correct me if I'm wrong but isn't the implicit assumption with the EPV that the current earnings are reflective of the future? Maybe it isn't as explicit as what a DCF or a P/E multiple investor carries out, but my feeling is that there is an element of forecasting involved. Like I said earlier, I think most investment methods involve forecasting; they just do it differently.

"You may not realize it but you are making a major forecast on the future of oil prices, and consequently the impact on rail transporation. Since you view the oil scenario as inevitable you believe it is a no-brainer, but since I'm bearish on oil and believe it may be unsustanable (the prices that is), this is not obvious at all. If anything, this is a macro call." - Sivaram

Yes, I also think Buffett adds macro component and forecasts in his decisions and has great sense of future (just like Yoda). I figured that out when I started investing few years back. I also to try to do that and I am a bottoms up value investor.

I do not want invest in something which has a lousy or clouded future regardless of price (could be because I am newbie).

But I do not want to pay for those rosy future forecasts, I prefer to pay for current and may be in some cases reasonably fair future. I do not put that rosy future growth % in DCF.

Buying companies which have a moat and rosy future and putting it in DCF to calculate value are two different things. ( Though I read under Munger/Fisher influence Buffett now pays more for the future than he was earlier willing to.)

As Jhodges puts it best - "I don't argue that one shouldn't think about the future. I argue that one shouldn't rely on it and use the "assumption" in order to establish a fact."

"I will study Greenwald and EPV more and also Whitman's style Balance sheet investing"

Whitman is one of the greats. I prefer his style over everything else to be honest.

"The comment about factoring in the future applies to any method. That is not a flaw with DCF alone since I am saying that should be considered for non-DCF methods as well."

It may apply to "any" method but it certainly doesn't apply to "all" methods. EPV assumes no growth, however, you could account for it if you choose; I don't.

"A lot of what Warren Buffett invests in only looks predictable and a "no brainer" in hindsight! How many people--not just anyone but value investors who act and think like Buffett--would have considered Coca-Cola to be a worthy investment in 1987? Same thing with, say, American Express, Washington Post, PetroChina or ConocoPhillips or Kraft."

Good point but the subject matter you are touching on here is the "art" to investing that no mechanical means (DCF) can produce.

"If we stick to Coca-Cola, I personally don't think it is as sustainable and obvious of a pick (assuming price was reasonable) as almost every value investor assumes. How do you know Coca-Cola, which largely produces unhealthy, sugary, drinks won't start deteriorating if consumers move towards more healthy drinks?"

I rather not engage in debating the specifics of any one particular company. I rather stick to the general subject of valuation.

"To see what I mean by the non-obvious-nature, consider your next comment about Burlington Northern Santa Fe:

JHODGES72: "I believe the obvious was forecasted in that as the oil reserves deplete, a cheaper means of transportation is needed. The fact that a railroad produces the cheapest COGS is another no-brainer."

This is a good example of how our views diverge. To me, BNSF is not an obvious pick. In fact, I don't take anything you perceive as inevitable to be the case. Perhaps it's because I'm bearish on commodities and China, but whatever it is, I have no faith that depleting oil reserves are going to result in a shift to rail."

Good point but the main point I was trying to get to, and I didn't do a good job with that statement I'll admit, was that a reserve such as oil, that more likely than not can't replenish itself will eventually deplete which will naturally cause in increase in demand and a decrease in supply which will cause the price to increase substantially. Currently you have the option of ships, air, truck, and rail. Out of all types of transportation, rail is the cheapest and most efficient. Therefore, a logical assumption based on current factual information can produce the answer: rail transportation has an advantage to their competition in respect to the depletion of oil reserves.

"You may not realize it but you are making a major forecast on the future of oil prices,"

No I'm not, I'm making a logical judgement that, regardless of commodity, price is governed by supply and demand. It's been that way since the beginning of time and it will continue to be that way. That's not a forecast. Nor did I name a price. Oil also happens to be in my circle of competence as I own 6,000 acres of it therefore when I speak on the subject - I am doing it from direct knowledge.

I have no idea what the price of oil will be tomorrow or next year but I can logically assume it will be higher than it is today - 20 years from now. Buffett didn't buy Burlington in order to reap the reward today. He's made that clear.

"Actually, Greenwald's bearish view of BNSF has everything to do with the future. Greenwald, like me, was arguing that Buffett is betting on a bullish oil forecast:"

I'll pull up the article and read it again.

"So, Buffett's biggest bet (at least in terms of dollars) has a lot to do with forecasting the future."

We're straying from the subject matter quite a bit here. There's nothing wrong with taking an educated guess about the future. It's often logical to do so. The issue of the conversation is: should one rely on a DCF? My answer is no because it assumes a "specific" percentile growth factor that no one could possible predict 10 - 20 years out in the future. Counter to that logic, one CAN logically assume and be justified in his assumption by applying common sense in that as long as the world populates itself and as long as no more dinosaurs roam the earth, oil will eventually deplete. When that will happen, nobody knows. At what negative annual growth rate will that be, nobody knows. BUT, the fact that it WILL happen is a logical assumption. The two examples are different arguments. As Graham stated: it is possible to know whether one is overweight by simply looking at them. No need for a weigh scale.

JHODGES72: "EPV does not forecast. Yes, it takes present earnings and answers the simple question "is the business undervalued or overvalued TODAY?""

"Correct me if I'm wrong but isn't the implicit assumption with the EPV that the current earnings are reflective of the future?"

Yes, but the model isn't for unpredictable businesses. One shouldn't attempt to value a business with any kind of model unless it has a history of sustainable earnings.

"Maybe it isn't as explicit as what a DCF or a P/E multiple investor carries out, but my feeling is that there is an element of forecasting involved. Like I said earlier, I think most investment methods involve forecasting; they just do it differently."

It has commonality to Graham's P/E method but it doesn't assume annual growth. There is a bit of "forecasting" with everything in life. It's something that is unavoidable. When you get in your car and make the decision to drive you are forecasting each day that you won't get killed. Sometimes it doesn't work out, most of the time it does. But the point to the EPV is that it recognizes obvious situations that is possible to avoid such as forecasting annual growth. It simply removes those obvious errors that we can deal with. Even valuing cash is forecasting that inflation won't turn into hyper-inflation. You can't get away from basic forecasting because making a "decision" is "forecasting" itself. However, you can get away from the inclusion of assumptions such as the growth rate of a business 20 years out.

P.S. I've had conversations with you throughout the last couple of years. You always preface your introduction with "I'm a newbie to value investing". I think it's time to find a new schtick as you've studied the value approach for at least 2 years that I know of. :)