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Strategies & Market Trends : Gorilla and King Portfolio Candidates -- Ignore unavailable to you. Want to Upgrade?

To: Zirdu who wrote (7456)	10/4/1999 10:05:00 PM
From: Mike Buckley	Respond to of 54805

RRanney, You asked why I used a 20% discount rate. When Buffet pegs his discount rate to the 30-year bond, he does that because it's virtually riskless insofar as the revenue stream is concerned. When I use a 20% discount rate, I'm pegging it to the historic returns over decades of the Fool's Foolish Four mechanical method. It's not riskless, but if you believe as I do that the fundamentals that rendered those returns remain in place today, you might also believe as I do that it's also reasonable to use that as the best-case scenario on which to base a discount rate. In other words, if I can't justify an investment using a 20% discount factor, I'm probably just as well off taking 15 minutes a year to implement the Foolish Four strategy. I wouldn't want you to think that all my investments meet that stringent test of a 20% discount factor. I rarely use a discounted cash flow model because there are so many variables that can be wrong, not to mention the discount factor itself! But when someone such as Stephens plops a highly detailed cash flow model in my lap, I'm likely to consider the results using their discount rate along with my 20% rate to get a feel for the range of possibilities. And yes, I agree with you that 13% is high when viewed in other defensible context. So it might not be a bad idea to run the model using a 10% and 6% rate. Make sense? --Mike Buckley