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Strategies & Market Trends : Gorilla and King Portfolio Candidates

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To: Stock Farmer who wrote (43552)	6/16/2001 1:46:08 AM
From: Mike Buckley	Read Replies (1) of 54805

John, I wrote: discount factor, which is the price an investor is willing to accept for the perceived risk You wrote: Here I risk picking nits You seem like a nice guy, but don't think for a minute that I'm gonna let you invade my territory. :) 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. ... 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% Yes, I understand your point. And as much as I think that's relevant, I still come back to the fact that it's the person doing the valuation that is deciding to use the WACC (or whatever) as the discount factor. I realize that Warren Buffett never actually ran a DCF, figuring that an investment needs to be such a no-brainer that if the calculations need to be run, then it's really not a no-brainer. Even so, does he "think" of the WACC as the discount factor when he runs them in his head? I seem to remember that he prefers to use the 30-year bond rate. As for the PEG, did you ever read Randy Befumo's series of articles years ago when he was with the Fool explaining that the PEG ratio is very much like a short version of the DCF? Unfortunately I tossed it from my hard disk long ago and don't remember the details enough to make the case. But I do remember thinking at the time that it made sense to me. By the way, I disagree with the notion that the PEG is popular because "any journalist with a calculator can compute one in a few seconds." I don't give most people in the financial press that much credit. You're right that they should be able to do that and would be able to do it if they made the effort to learn. But I really don't believe they do; I don't think they'd write the stuff they do if they understood PEG ratios. Witness this bit of stupidity in this week's Business Week about an issue much simpler to grasp than a PEG ratio: Message 15943879 --Mike Buckley

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