John, Pirah, and all,
If you do not feel like understanding the math, then please credit those of us who obviously do for some intelligence and accept our assertions.
I'm going to assume that's a joke, John, based on its context. If not, get back to me, please.
As I've read all the posts, I've come to the conclusion that the differences of opinion have a lot more to do with the definition of "fiction" rather than anything having to do with the math. My impression was that the issue of fiction as a basis for a PEG ratio, or lack of it, was what the discussion was all about, not which of the three models (DCF, PE, or PEG) is the best one to use.
I also don't believe my inability to understand the theory of the math should be construed with an inability to run a DCF. I can (and have) run PEs, PEGs, and DCFs, but I can't begin to explain why the math validates one model more than the other.
DCF analysis. It's simple really. It is eye-opening when compared to some of the prices of tech stocks. Go ahead, give it a try. Maybe compare the results to PEG.
As I mentioned, I've run DCF models in the past (not recently.) I've found that regardless of the model, the biggest problem is in understanding the probablities about the future of the company in question.
For me, the key to investing is to first determine how competitive a company's advantage is, followed by a determination of how sustainable it is. Once a company passes that acid test, I'll look at valuation. There are ways I apply a range of PEG ratios to my investing decision, but it's mostly art, not science. I use other methods as well. Years into an investment, we see how good the art really is. Sometimes it's great, sometimes awful.
Back to this comment again: DCF analysis. It's simple really. It is eye-opening when compared to some of the prices of tech stocks.
Yes, it's simple to run one. I hope everyone has noticed that Pirah and I have long banged the drum insisting that anyone who can master the qualititative issues of Gorilla Gaming can easily master running a DCF. It's good to have John joining us in the percussion section.
However, it's not simple to arrive at a DCF that is especially meaningful just as it's not simple to arrive at a PEG that is especially meaningful. That's why it's more art than science. If running a DCF that accurately predicts the cash flows and thus projects a fair value for owning part of a company was really so simple, we wouldn't have had all the VC firms and other so-called professional investors using DCFs paying prices for companies that are unsupported by what those cash flows ultimately prove to be. In fact, some of those companies don't have a cash flow on this very weekend.
Just my way of looking at investing. There are lots of ways to invest profitably.
--Mike Buckley |
