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Myth 4.1: If you don't like betas (or modern portfolio theory),you cannot do...
Letâs start by stating the obvious. You need a D(iscount rate) to do D(iscounted) C(ash) F(low) valuation. To get that discount rate, I use a beta to estimate a cost of equity (and cost of capital)...
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Myth 4.2: It's all about D in the DCF
If you have taken a class on valuation, think back to what you spent most of your time doing and I will wager you spent it talking about discount rates. If there was any attention paid to cash flows...
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Myth 4.3: The D cannot change (over time) in a DCF
In my last post, I argued that academics and practitioners pay too much attention to discount rates in valuation and too little to cash flows. One reason for that attention may by the fear that you...
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Myth 4.4: The D(discount) rate is a receptacle for your hopes and fears
In discounted cash flow valuation, discount rates are the instruments that we use to adjust for the risk in cash flows. In practice, discount rates often take on a far greater role. Some analysts use...
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Myth 4.5: DCFs break down with near-zero risk free rates!
In any version of a risk and return model for discount rates, where you start with a riskfree rate as a base and build up to costs of equity, debt and capital, it seems blindingly obvious that as...
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The Trump Effect on Markets: A Financial (not a Political) Analysis!
I have political views, but I try to keep them out of my classes and my blog posts. I teach and write about corporate finance/valuation, not political science, and I don't think it is fair to subject...
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Family Feuds: The Promise and Peril of Family Group Companies!
I teach a corporate finance class, a class that I describe as big-picture (since it covers every aspect of business), applied and universal in its focus. I use six firms, ranging the spectrum from...
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Faith, Feedback and Fear: Ready for the Valeant Test?
It is easier and more fun to write about your winners than your losers, but it is also far more important and valuable to revisit your losers, where the story has not played out the way you hoped it...
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Myth 5.1: If you don't believe in forever, you cannot do a DCF
If you are not interested in intrinsic valuation and feel that discounted cash flow valuation (DCF) is a waste of your time, you may want to skip these next few posts, which continue a series that I...
View ArticleMyth 5.2: As g-> r...To Infinity and Beyond!
In my last post, I started off by providing a rationale for a terminal value and presented alternatives to the perpetual growth model. That said, most DCFs are built with the the perpetual growth...
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Myth 5.3: Growth is good, more growth is better!
The perils of holding all else constant in perpetual growth equations and playing with individual inputs, not only leads to the use of impossibly high growth rates but also inflates the importance of...
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Myth 5.4: Negative Growth Rates forever? Impossible!
As you peruse discounted cash flow valuations, it is striking how infrequently you see projections of negative growth into the future, even for companies where the trend lines in revenues and earnings...
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Myth 5.5: The Terminal Value ate my DCF!
When you complete a discounted cash flow valuation of a company with a growth window and a terminal value at the end, it is natural to consider how much of your value today comes from your terminal...
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Active Investing: Rest in Peace or Resurgent Force?
I was a doctoral student at UCLA, in 1983 and 1984, when I was assigned to be research assistant to Professor Eugene Fama, who wisely abandoned the University of Chicago during the cold winters for...
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Active Investing: Seeking the Elusive Edge!
In my last post, I pointed to the shift towards passive investing that has accelerated over the last decade and argued that much of that shift can be explained by the sub-par performance of active...
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January 2017 Data Update 1: The Promise and Perils of "Big Data"!
Each year, for the last 25 years, I have spent the first week playing Moneyball, with financial data. I gather accounting and market data on all publicly traded companies, listed globally, and then try...
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Narrative and Numbers: How a number cruncher learned to tell stories!
When I taught my first valuation class in 1986 at New York University, I taught it with numbers, with barely a mention of stories. It was only with the passage of time that I realized that my...
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Almost time for class: My Line Up for the Spring Semester!
If you have been reading my blog for awhile, you should be familiar with the routine at the start of every semester. If I am teaching that semester, I list the classes that I will be teaching, describe...
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January 2017 Data Update 2: The Resilience of US Equities!
If asked to list the biggest threats to US equities at the start of 2016, most people would have pointed to the Federal Reserveâs imminent retreat from quantitative easing and the possibility of a...
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January 2017 Data Update 3: Cracking the Currency Code
There was a time in the not so distant past, where analysts could do their analysis in their local currencies and care little or not at all about foreign currencies, how they moved and why. This was...
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