What worked in the market from 1998-2008? Intrinsic Value, Discounted Cash Flow and Margin of Safety

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Dec 01, 2008
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Does business quality and stock valuation still matter in investing? In this kind of stock market it seems not. Lets ignore the current stock market and focus on what works in long term value investing.

This is Part III of the series of our back testing study What worked in the market from 1998-2008? In Part I we found that companies with predictable revenues and earnings outperform the market averages, they also suffer lower probability of loss, hence we introduced the concept of Predictability Rank. In Part II we reported that the undervalued predictable companies outperformed the market by even greater margins. In this article (Part III) we would like to discuss discounted cash flow model and margin of safety. We also analyze the correlations between the DCF model, margin of safety and the performances of the stocks. We try to find out what is driving the long term performance of stocks. Discounted cash flow model and margin of safety are discussed in details.

Part I: What worked in the marketfrom 1998-2008? Part I: Predictability Rank

Part II: What worked in the market from 1998-2008? Part II: Role of Valuations

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<img src="https://images-na.ssl-images-amazon.com/images/I/41HZteDolmL._AC_SX75_CR,0,0,75,75_.jpg" align="right"> Charlie Tian, Ph.D., is the founder of GuruFocus. You can now order his book <a href="https://goo.gl/OZ6xWO">Invest Like a Guru</a> on Amazon.