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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: bruwin who wrote (61604)	1/1/2019 10:33:37 AM
From: Graham Osborn	Read Replies (1) \| Respond to of 78760

You're right that cash flows and interest rates are the key assumptions. The key is to err to the downside on cash flows and err to the upside on interest rates. Additionally, it helps to test the valuation sensitivity under different interest rate assumptions. By default I usually use the 4% long-term inflation rate as my interest rate since the other drivers of interest rates tend to be shorter-term in nature. But I will also often test higher rates (e.g. 10%) to see whether my margin of safety is adequate. The best backstop against hyperinflation is front-loaded cash flows or a very high growth rate. Anyway, the discounted cash flow method is what Buffett uses. There are many errors that security analysts make in applying it, e.g. how they calculate free cash flow, how the select the discount rate, and how they treat terminal values. But Buffett has made it clear that he ignores most of the common ratios and focuses only on the present value of future cash flows: cnbc.com PS: I reviewed the Washington Post's old filings yesterday. It looks like Buffett paid about 1X book (more like 4X tbook since about 75M of their 100M in book was goodwill) and about 7X earnings, which he considered to be about 1/4 of value to a private owner. The business was growing around 15% a year top line between 1974-1978. If you assume 15% annualized growth and a 75% initial discount you would expect that to be a 65-bagger between 1975 and 1995. It turned out to be a 43-bagger over that time frame (growth probably slowed later on). If you are buying a great business at a cheap enough price, you should get the same answer by multiple methodologies.