I think people are far too imprecise about what it means to be a "value investor." To me, a good definition is "someone who buys an asset with the view that the retained or distributed cash flows OVER HIS HOLDING PERIOD will exceed the principal invested, plus inflation and an appropriate risk premium."
If that view is correct, the conventional DCF methodology is only applicable if you have the ability to (1) forecast future cash flows indefinitely (2) hold indefinitely. Buffett's purchases of See's, Washington Post, GEICO, and Coke did not fulfill these criteria, but they came much closer to doing so than in most cases. How do the rest of us stack up?
The maximum holding period for long-short hedge funds typically ranges from months to years. Even if their analysts were capable of (1), their models would be useless without (2). To me, these fund managers are not value investors.
Similarly, there are many retirees around the world with <10 year time horizons who hold assets that have no possibility of returning principal in <10 years. Obviously these people have no particular insight on (1), and their life situation precludes (2). To me, these retirees are not value investors.
Of course, if you bought at a discount to net current assets then your holding period to exceed the required return threshold could hypothetically be zero. But this condition only applies to the purchaser who can buy enough stock to gain control and liquidate the company's assets. For most others, dividends or market appreciation are the only means of earning a profit.
When I buy a stock I typically plan to hold for 10 years, so I only sum 10 years' worth of cash flows. The shorter term an investor you are, the less a given business is worth to you.
As radical as that concept sounds, I think Buffett would agree with it. |
