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

To: Paul Senior who wrote (4497)	7/24/1998 10:04:00 PM
From: James Clarke	Read Replies (1) \| Respond to of 78688

Discounted cash flow forecasts are absolutely the right way to value a stock in theory. But as my favorite business school professor told me, "In theory a giraffe shouldn't be able to walk, but it does." I was an investment banker for four years, and spent many an allnighter creating ever more elaborate DCF models. Now that I am actually buying these companies, though, I consider that analysis an absolute waste of time because it is so sensitive to the slightest change in inputs. I have no delusions that I can forecast most of the businesses I own for two years, let alone 20. That is what Graham teaches me - when you buy at a low enough price, it doesn't matter if you're off by 20%, you still make a lot of money. That said, though, free cash flow is the most critical concept in investing. Wall Street is obsessed with EPS and quarterly earnings forecasts, which I just consider silly. But really, that is all anybody talks about. 1. You can doctor earnings, but you can't fake free cash flow 2. You can't spend earnings Take a look at Sunbeam's financials for the last three years. The company had an earnings turnaround, but free cash flow stayed negative. It should have surprised nobody when the story fell apart. Jim

To: Paul Senior who wrote (4497)	7/31/1998 1:10:00 PM
From: Alejandro	Respond to of 78688

Paul and Jurgis: Just got back and saw your responses to my "cash flow" question. Thanks. Paul: I don't think you can pick a stock based on cashflow only either. However, I use it with other indicators i.e. PSR,PE,etc. I've stopped using book value in my system of analysis although there are those who consider it important. I have recently been exposed to EV. I really don't know how to use the result quite frankly. As far as cashflow and cap spending are concerned. Both are listed by ValueLine. Must mean something to them. ac