Andrew:
Thanks for all your posts. First off let me clarify soemthing. You
and I are on the same wavelength philosophically as far as I can tell.
I pretty much go entirely by FCF for valuations, and while I may pick
from a different set of stocks than you do, I am going by qualitative
factors that would not be alien to you.
My only "difference" (and by putting it that way is to express that
it isn't a disagreement, just a different way) is in the numbers
calculated. I was very sincere when I expressed that I believe that
Buffett's success has much more to do with his judgement than with his
mathematical methods.
To explain the VL method I use. From VL it is pretty quick to calculate the FCF for past years, and because they are very complete
in their projections, it is possible to do the same for the next year and for 3-5 years down the road. Of course it is still guessing, but at least they have some guidance from the company.
Anyway, if you wanted to try the method, merely calculate the FCF for
98 and for "00-02" based on their projections. From those two numbers you can calculate a growth rate and thus FCF for the intermediate years. Add the four years FCF, don't bother with discounting (while it would more correctly value FCF a few years out, at the level of
guesswork her anyway it would be a misleading sort of accuracy) and then treat it this way: if you spend $X/share, and you get $Y FCF,
then what is the "coupon?" That is, if you put a dollar in the bank
and four years later you find you have $1.40, you would have earned interest at (1.4^0.25)-1 or about 9%.
You can then both compare this to the long bond (and if you get one that has a coupon better than the long bond over a very short time frame, you know that is good) and to other stocks, pick out the best.
I would say that this approach may be more appropriate for shorter
holding periods, since a stock which really will be around forever may show up as expensive. But many of the stocks you listed I suspect are not ones you would look to hold forever, as Buffett does, and so applying even a 10 year time frame could give misleading numbers.
This has been good. In response to one of your comments, no offense
taken at anything, not none intended on anything.
BTW, I do think the markets are efficient, I just don't think they are
rational. :-)
Pirah |
