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Strategies & Market Trends : Gorilla and King Portfolio Candidates
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To: Mike Buckley who wrote (43548)6/15/2001 11:14:08 PM
From: Stock Farmer  Read Replies (4) of 54805
 
Hi Mike

>>Why did you stay in hiding for so long? :)<<

Would you believe I was comfortable with others doing the typing?

>>Price-dependent valuation methods have their faults, but I don't think it's that they are dependent on price<<

Yes, most of them like P:E and P:E:G and P:S and P:B are silly ratios. So much in vogue I think because any journalist with a calculator can compute one in a few seconds. But like I like to say, PE is to value what height is to weight... loosely correlated and often very wrong.

These ratios are useful... don't get me wrong... but under controlled circumstances. Like where an order of magnitude of uncertainty is acceptable.

Or perhaps as a cudgel.

>>I also think the DCF valuation method is a good one, but not because it is price-independent.<<

Here we agree completely, even though it may be for different reasons :) I listed my top 5 reasons, none of which was price independence.

>>discount factor, which is the price an investor is willing to accept for the perceived risk<<

Here I risk picking nits, but I hope it is abundantly clear that the discount factor is the price of capital that the company must pay. Not determined by the individual equity investor. But by the aggregate. Also inclusive of bond investors, financial institutions, leasing agents and so on when averaged across all actual sources and sinks of capital that the company has at its disposal. This of course is the province of the CFO.

The main implication is that whether you happen to want 15% or I want 6% is irrelevant if the company's actual WACC is 12.25% To the purist at least. If unknown (and often this is the case), I guess 12% :)

John.
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