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

To: Jim Mullens who wrote (952)	6/14/2004 8:46:28 PM
From: Mike Buckley	Respond to of 2955

Jim, It’s my understanding that the DCF model ( a determination of today’s “fair value”) with its discounting/- risk/ reward mechanism, would lead one not to buy today regardless of a potential double in four years. If I understand you correctly, you've got a misunderstanding. As an example, if the DCF model you use says the stock is worth $20 at the time the market is paying only $10, it is implicitly telling you to buy. If all those assumptions become reality, the Q doubles, then DCF followers miss an opportunity to double their money. Yes, but if the Q decreases by 50%, they also miss the opportunity to lose half their money. Again, it all comes down to whether or not the assumptions about the future are accurate. There are a lot of assumptions to make in a DCF model and some folks (not I) know how to use it wisely. Does then the DCF discounting mechanism overstate the “risk” in the risk/ reward discounting mechanism? The discounting mechanism doesn't over or understate anything. It's the person making the assumption that does that. Garbage in, garbage out. In other words, if all the assumptions become reality, does DCF still understate the present worth of the company because of the discounting factors for risk (not the discount factor associated with the value of money/ interest rates)? Again, if all the assumptions are accurate, the DCF neither understates nor overstates. It simply determines the accurate number. But that does indeed depend on the assumptions being accurate, which has absolutely nothing to do with the model itself and everything to do with the person using it. DCF analysis assigns to high a level of risk and is therefore not appropriate. Jim , read my lips. :) The model doesn't assign anything. It's the person using the model that assigns the level of risk. If that person assigns it incorrectly, the result is an inacurate model. If that person assigns it correctly, the result is an accurate model insofar as risk is concerned. But there are a lot of other factors in DCF models other than risk. --Mike Buckley

To: Jim Mullens who wrote (952)	6/14/2004 10:49:45 PM
From: rkral	Read Replies (1) \| Respond to of 2955

Jim, re "does DCF still understate the present worth of the company because of the discounting factors for risk (not the discount factor associated with the value of money/ interest rates)?" DCF is merely the present value, i.e., an estimated interest-rate discounted value, of an estimated stream of future cash flows. There is no "risk discounting", per se, AFAIK. The risks to the investor are that actual cash flows will be less than estimated and/or .. that actual interest rates will be greater than estimated. Ron