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Strategies & Market Trends : Gorilla and King Portfolio Candidates

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To: Pirah Naman who wrote (39403)	2/16/2001 5:24:43 PM
From: Seeker of Truth	Read Replies (2) of 54805

Hello Pirah, I studied your posts which you kindly cited. I think they could be most valuable. I decided to junk my efforts and follow your scheme. BUT, I have some questions before I can understand your method. I understand clearly that a sum of money S at a distance of n years, which we discount at k, is worth S divided by ((1 - k) raised to the nth power). If our discount rate is 15% and the sum is 10 dollars and the time is 5 years from now then it's worth 10 divided by 1.15 to the 5th power. The latter is roughly 2 so the ten dollar bill of 2006 is worth 5 dollars to us here and now.. What I don't understand is how you derived the formula for the residual value. R = FreeCashFlow(next year)/(k - g). R is the residual value. k is our discount rate. In percent it's k%, in decimals it's 0.01 times k. g is the growth rate. This formula seems to come from heaven. Since I'm an atheist I just don't get this one. What if k = g? Then our Residual value is infinite? What if k is less than g? Then our residual value is negative? And what would that mean? I realize this may sound to some like an attack but I am strongly attracted to your scheme; I just want really to understand it. You are very kind to help us all with your instructions. I'm asking you this question on the thread because some other curious friends may be asking themselves the same questions. Yes Uncle Frank, the primary matters are all qualitative. Is the company a gorilla? Where's the value chain? What's the nature of the quasi monopoly which forces everyone else to build around their product? etc. etc. But having satisfactorily answered all these questions we still have to decide if we are paying too much. JMHO. By the way Don Mosher's post about WIND aroused my interest so I looked up the free cash flow, following your teaching. It doesn't seem to be growing appreciably. We seem to be too early for the tornado. So buying WIND at all looks like paying excessively. That's an interesting conclusion. Of course there's no certainty. Buying before gorilladom is established may of course be very profitable but the same could be said of betting on the horses etc.

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