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Strategies & Market Trends : Gorilla and King Portfolio Candidates
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To: Curbstone who wrote (21363)3/26/2000 2:23:00 AM
From: Mike Buckley  Read Replies (1) of 54805
 
Mike,

I don't remember the details of the discussion by Moore enough to respond to what he is saying. Instead, I'll respond by agreeing with you that it does make sense to apply a range of discount rates to particular periods of time to get a feel for a range of present value. In other words, if there is reason in your mind to discount the cash flows enjoyed from years #1 through #10 at X% and the cash flows from years #11 through #20 at Y%, that's certainly a valid approach to determining the present value of those cash flows.

Is Moore really suggesting that we try to apply a standard valuation metric such as Discounted Cash Flow Analysis to companies that (especially of late) have mocked almost every conventional metric except public perception of value?

I think it's more basic than that. An apple tree is worth the value of the shade it provides, its aesthetic value, and the value of the apples it bears every year. Similarly, a company is worth the present value of its future cash flows.

In the coldest of terms, companies are formed only to make money and their worth is measured only in the money they are expected to make. That's why a discounted cash flow analysis is and wil always be a viable metric if the assumptions about the future cash flows and the discount rates prove to be reasonable. There will always be valuation metrics of the moment that become popularized -- the price-to-vision metric being no exception -- but the one metric that will remain viable even if it is entirely misused and misunderstood is that a company's worth is the present value of the money it makes in the future.

--Mike Buckley
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