Is DCF useless?
I had a discussion with a guy that claimed he had 5+ years of professional experience in trading, equity research, portfolio construction, and he insisted that DCF valuation of companies is useless. He said that DCF is only good for things like bonds with very stable and predictable cash flow, while DCF for a company requires too much “guessing”. Instead, he uses his own approach with 5 types of analysis (although he admitted that he uses target prices provided by research firms, so basically he still indirectly uses DCF to some extent) and his returns at least two times better than S&P 500 (but he refused to tell any risk-adjusted measure of performance).
I know that DCF is part of CFA level 2 curriculum and I skimmed some textbooks on valuation and I know that there are 3 approaches to valuation (dcf,relative valuation, contingent claim valuation) and each one of these approaches has its constraints and cannot be used in some cases, but I had an impression that DCF is nevertheless a go-to approach to valuation. However, I am outsider to the investment industry so I am still wondering whether DCF is really becoming obsolete and it’s one of those things you learn in college but (almost) never use in real life.
So my question to those of you who is professionally involved in companies’ valuation: Is this guy right? Is DCF useless?
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