DW: I don’t know if there’s an exact checklist. There’s no magic formula because every situation is a little different. But if you’re talking about what my ideal investment is, first of all I want a good underlying business.
A business that is, hopefully, getting better over time, so time is your friend. Then I really need to have management who are committed to doing the right thing, who I sometimes describe as being in the boat pulling the oars in the same direction as the rest of the shareholders. I think you want to have both those factors plus an undervalued security price.
When you have those 3 things, then you have a trifecta. And you want a trifecta.
I probably inherited Michael (Price)’s skepticism for DCF. I think of DCF as garbage-in, garbage-out. Conceptually it’s right, but the ability of anybody to make accurate estimates is low. During the many years I worked for him, one of the lessons I learned from Michael was not to be so dependent on earnings. Wall Street is so obsessed with, “Did they beat by a penny? Did they miss by a penny?” If you’re investing in securities that are so contingent on that, the possibility increases that you’re going to get beat. Our approach is to try to buy today at a discount and get tomorrow for free. Somebody showed me a DCF model last week and I looked at it and I was pretty skeptical. They had a terminal growth rate of 2%, and I asked, “What happens if it becomes 5%?” The value went up by 100%.
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