Very well-written and easily understandable quote but is it it practical?
Cash flows are hard to project - especially, changes in NWC. This means if you get the working capital cycle wrong in your cash flow model, the whole valuation could be totally off - and, of course, this effect increases if net margins are small to begin with.
And, of course, in some industries, technologies change rapidly so a company that may have historically earned a high free cash flow (I'm assuming by cash flow, Dr Burry means free cash flow) margin may not have that same margin going forward.
Imo, the present value of future cash flows can only be used in certain occasions.
Even then, why discount cash flows and not earnings - after all, Buffett says earnings. And Buffett's idea was inspired by a dividend discount model. So, why not dividends?
I know this is technical stuff and may not be important to some, but, to me, it's vital that I've got the fundamentals nailed down early.
Best,
Harshu Vyas |
