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Strategies & Market Trends : Free Cash Flow as Value Criterion
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To: Andrew who wrote (56)10/30/1997 4:17:00 PM
From: Pirah Naman  Read Replies (2) of 253
 
Andrew:

I think I am missing something in your post. MOST of it reads to me like things we (you and I) have already establshed agreement on:

1) absolute value
2) exactitute
3) subjective evaluation

Am I reading it correctly?

The only difference I see is in the actual calculation. You are arguing for using the Gordon Dividend valuation method with the application of the Miller-Modigliani Dividend Irrelevancy Theorem. I don't think this is wrong. But to reiterate (perhaps clarify?) my position,I've got two points of difference:

1) Doing the math in this case is almost superfluous, because almost
nothing is overvalued today. Seriously! If you calculate the value to you, rather than the intrinsic value, by discounting at your expected rate of return, then you can weed out some companies, but you may have to be "unreasonable" in your expectations. I just don't think the math addds much if any value to the selection process in this case.

2) VERY few companies are going to be good for the next 30 years. I can see your subjective argument for MCD being "permanent" but not COHR. If you really intend to HOLD ala Buffett than that eliminates almost all companies.

In a taxable account, I buy to hold. In tax deferred,I am willing to sell, and I recognize (from experience) that I can outperform the market by a broader margin if I work with a shortER time frame. I don't look at next quarter, but over 3-5 years. In that time period, the shorter range projections offer a better chance of separation.

Now you were commenting on absolute value. You will note that Buffett's "quick test" was to see if next year's FCF would exceed the long bond yield. If so a company was an immediate buy on that criterion, since a bond has a fixed coupon and the companies would be expected to rise. This is essentially what I do using the VL numbers.

Pirah
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