DCF is not useless its the people who are using it
Thank you all for sharing your thoughts. That was helpful.
In general, DCF’s tend to have an overblown reputation among academics (because it fits in well with theory) and people who have never been paid to professional value anything (because it sounds precise). Not personally directed just an observation based on what I see from students etc. I mean its definitely a necessary skill to have if you’re applying for jobs, but needs to be kept in perspective.
There’s definitely something to it 
I guess it’s also some psychological need in predictability, stability, whatever.
an interesting buffett answer on how to determine intrinsic value: tldr, its dcf
https://youtu.be/TmWW7tsCuGQ?t=119
people in our industry are more obssesed about relative multiples though because its about the current environment, but honestly thats just comparing the current price of an eps. has nothing to do with intrinsic value. an example if a was acquired at this multiple then mine should trade at that multiple as well.
False man, for a Buffett acolyte you should know better:
1996 Berkshire Hathaway Annual Meeting:
Buffett: “We don’t formally have discount rates. Every time we start talking about this, Charlie reminds me that I’ve never prepared a spreadsheet, but I do in my mind. We just try to buy things that we’ll earn more from than a government bond – the question is, how much higher?”
Munger: “Warren often talks about these discounted cash flows, but I’ve never seen him do one. If it isn’t perfectly obvious that it’s going to work out well if you do the calculation, then he tends to go on to the next idea.”
Buffett: “It’s true. If [the value of a company] doesn’t just scream out at you, it’s too close."
Buffett: "That’s what we do. If you need to use a computer or calculator to figure it out, you shouldn’t [buy the investment]. Those types of [situations] fall into the “too-hard” bucket. It should be obvious. It should shout at you, without all the spreadsheets. We see something better.
Munger: Some of the worst business decisions I’ve seen came with detailed analysis. The higher math was false precision. They do that in business schools, because they’ve got to do something.
lol, yea but you do undestand that just because he didnt do a speadsheet doesnt mean its not dcf.
he did dcf, he just did it mentally.
I hear you, I do understand the general point that yes, he looks at cash flows and considers his rate of return in a back of envelop that’s 15% a year sort of way. I think that’s about as far as he goes on that having read through a lot of the material out there from him and Munger. But to my point, there’s literally no difference between doing that sort of back of the envelope “DCF” analysis and a multiple valuation. If you’re doing a simple I’m looking for 15% FCF to EV type analysis there is no mathematical difference to saying you want to pay 6.7x FCF or whatever. You just invented a back of the envelope DCF in your head WB style. You take it a step further and just proxy FCF with EBITDA and you just reinvented multiple valuation.
Which is sort of my point, it’s just two ways of arriving at the same conclusion. The only scenarios where they begin to differ are when you start wading into finer point computational complexities or nuance that a multiple may not be able to cover, but in those cases, I’d redirect you to the WB quote above.
To clarify, I’m not saying a great analyst can’t rely exclusively on DCF if that’s what they like, I’m just saying an equally great analyst can reach the same conclusions using multiples.
its a bit different imo. multiples look at 1 year earnings. granted they may apply a cheap/expensive multiple depending on the outlook of the business. like they do to energy cos during peak earnings when oil prices are high.
personally when i look at an earnings multiple, i look at it as how many years it will take to earn what i paid. which is stupid cuz earnings growth can easily change the number of year it will take etc. or when say a company is in trouble and sells at a low multiple, i look at how many years it takes before it dies.
dcf takes a more holistic view of all future cash flows, and gives a discount rate for each one. there is larger weight for earlier cash flows, but a co with a faster growing earning potential than the discount rate will have a really good valuation a. while a shittty investment or cigar butts will have a terminal value far shorter when they ultimately no longer cash flow.
anyways the majority of people use multiples. and hte most common mistake most people do is buy a cheap mutliple stock, when they should actually focus on the stabiltiy of expected future cash flows of the business.
^ Yes, that’s where typically if you’re investing with Buffettesque margins of error you A) are buying mature businesses with stable earnings and B) can safely use cycle adjusted earnings for your base like CAPE or an EBITDA equivalent to get around the one year issue. I understand that DCF more clearly delineates the cash flows, but analysts get around this with multiples by targeting through cycle multiples or pricing a multiple off of a more indicative year then discounting back. It’s not really a big issue, but ultimately, I think both methods are very interchangeable based on what you’re comfortable with / find intuitive. If you’re modeling you’re definitely making a ton of small assumptions (and some not small ones) and on multiples you tend to sort of aggregate those assumptions, regardless I think you wind up in similar positions if both are done responsibly.
If you’re arriving at very different outcomes with each method, one is probably not being applied correctly or your assumptions are not consistent.
That’s true. Like today rates are low and buffett was like at these low rates multiples are at fair value or something like that. So you are right, they use the multiple to factor it in. I just don’t like how people forecast 1 earnings and apply a multiple and call it a day.
^ Yeah that’s fair, I do think a DCF prevents shortcuts and people who take shortcuts tend to gravitate towards multiples / rel val for that reason so it’s more frequently abused. But that’s more a flaw of I think sloppy analysts and lazy thinking than multiples themselves.
three things that will get in you in trouble:
ladies, liquor, leverage
~buffett
you think trump had problems with alcohol?
He doesn’t drink.
So yes.
He probably hates dogs too:
I also don’t have a dog because I don’t have any time, he’s so relatable!
Yeah I really can’t understand people who own dogs. Seems desparate.