Hi John,
Of course, DCF is obviously flawed, because it did not predict the ability to sell CSCO at $75 last year.
i Must disagree. DCF is not intended to predict irrational price movements, even though such movements may represent the notional value of a firm. DCF is intended to provide an indication of NPV, or intrinsic value. such information may be of interest to the extent notional value deviates from it.
In the end, all models are wrong, some are merely useful.
again, a model such as DCF is OK as long as one understands its intended use. a pistol is not very useful for eating soup, but that doesn't mean the pistol is wrong.
having said that, peeple could calc. DCF NPV and say X dollars is where a stock "should" trade, so if the stock is 2 times X, then i will Short it. however, perhaps it goes to 10X, in which case one's short could be in bad shape. if the stock subsequently goes to X (and perhaps X is zero) it will be a Pyrrhic victory if one has gone bankrupt in the meantime.
such is to say that models are one things, and real world applications are another. |
