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Strategies & Market Trends : Free Cash Flow as Value Criterion
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To: Reginald Middleton who wrote (141)11/4/1997 5:36:00 PM
From: Pirah Naman  Read Replies (1) of 253
 
> You are not understanding what you are reading.

I'm rather thick skinned, but I will point out that this is the second consecutive time that you have chosen to speculate or pass judgement on what I may or may not know. Address the issue, not the individual.

> The prudent man rule guides the investor to require a return that will be equivalent to investing in an alternative riskless asset.

Disregarding the fact that there is no such thing as a riskless asset (it is a modeling assumption), the potential investor in Intel does not have an alternative riskless asset that yields 13% while the same potential buyer of Microsoft has an alternative riskless asset that yields 11%. This potential investor does not have the choice tree:

1) Buy Intel or put in instrument guaranteeing 13%

OR

2) Buy Microsoft or put in instrument guaranteeing 11%

What the Intel OWNER does have is the choice:

1) invest more in the business at a cost of 13% or
2) invest the money elsewhere

And the MSFT owner has the choice of

1) invest more in the business at a cost of 11% or
2) invest the money elsewhere

When I write above "invest more in the business" the key word is "more." To invest to expand or grow business. Buying the business does not in itself put more money into building a new factory or into hiring new people. Nor does buying part of it when conducted on the secondary market.

> Therefore the investment that you are trying to value has to be
compared to that of a riskless asset

I agree that this is the way to estimate intrinsic value. That theoretical riskless asset does not change yield when compared to different stocks.

> part I of the valuation primer has outlined the many weaknesses in the discounted earnings methodology.

I don't recall any disagreements, nor do I recall anything there which affects this point of disagreement. But I freely admit to not having memorized it.
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