tag:blogger.com,1999:blog-8152901575140311047.post7497926748455777548..comments2024-03-28T12:49:46.624-04:00Comments on Musings on Markets: DCF Myth 3.2: If you don't look, its not there!Aswath Damodaranhttp://www.blogger.com/profile/12021594649672906878noreply@blogger.comBlogger14125tag:blogger.com,1999:blog-8152901575140311047.post-85167424079420359782016-06-19T12:24:14.741-04:002016-06-19T12:24:14.741-04:00Professor,
With Monte Carlo simulations, one shou...Professor,<br /><br />With Monte Carlo simulations, one should use Dependency Ranking. This technique highlights which assumptions are more important, by order.<br />The process to run dependency ranking is quite simple: test each assumption individually and find the stress-point for each (say, the point where Apple's value is <= $90/share). Then, simply calculate the variance in percentage points from that stress point to the base case assumption.<br />The smaller the variances, the more sensitive the assumption is (and therefore the ones with the highest impact on value).<br />It is quite easy to build a macro using VBA to run such a test. If you are interested, I can adapt your model.Anonymoushttps://www.blogger.com/profile/06278781524411434994noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-506677703121850202016-06-15T07:27:30.196-04:002016-06-15T07:27:30.196-04:00Dear Prof. Damodaran,
I have read one of your pap...Dear Prof. Damodaran,<br /><br />I have read one of your papers on taxes in valuation, namely dealing with deferred tax liabilities (both current and the PV of future ones based on the difference between marginal and effective tax rates), and have been able to fully grasp the logic. However, I was surprised to see it was not incorporated in your valuation model that you had provided (on Apple, in this very case). I would appreciate if you could clarify the reason (perhaps, it is insignificant and ignored on purpose)?<br /><br />Kind regards,<br /><br />TimTimhttps://www.blogger.com/profile/16231184752945989649noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-18319879940605330632016-06-01T09:35:46.846-04:002016-06-01T09:35:46.846-04:00Regarding investing in growth companies using DCF,...Regarding investing in growth companies using DCF, CAPM, i almost never can find a growth company, even using aggressive revenue and margin assumptions that justify buying a stock vs. the market price. Can you respond to this? Is it as simple as waiting for over priced stocks vs. fundamental assumptions to correct? Sometimes that may take quite some time.<br />Thank you.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-59517309672199029682016-06-01T09:33:29.402-04:002016-06-01T09:33:29.402-04:00The world of old-time value investing is shrinking...The world of old-time value investing is shrinking by the day.<br /><br />Prof D: This is a comment you made somewhere, above. Would you please expoud/elaborate the thought further? Thank youAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-28782512105341777382016-05-31T02:38:05.976-04:002016-05-31T02:38:05.976-04:00Prof,
My apology for speculating on Mr. Buffett&#...Prof,<br /><br />My apology for speculating on Mr. Buffett's mind, which I shouldn't. As you can tell by now, I'm a huge fan of Mr. Buffett.<br /><br />Well, I guess different people define 'growth' differently. Most people did not realize that, since BRK started buying IBM in 2011, the trend of dividend per share was $2.90, 3.30, 3.70, 4.25 and 5.00, a CAGR of 14.6%. Sure, it looked like rubbish to the 30-50% annual growth of FB/AMZN, but at least BRK didn't pay a lot for that growth.<br /><br />In the end, it boils down to opportunity costs. Try imagine this - if Mr. Buffett somehow say yes to AMZN and FB, and he had $13.8 billion X2 to allocate to both stocks in the past 5 years, do you think he can accumulate them at attractive valuation? <br /><br />If you are good at imagination, you'll probably be trembling to think about betting $13.8 billion into some unpredictable growth, at gung-ho valuation.<br /><br />P/s: prof don't get me wrong, I'm a huge fan of both AMZN and FBBetronisthttps://www.blogger.com/profile/06214864059300244383noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-28705758563855117902016-05-30T12:17:24.278-04:002016-05-30T12:17:24.278-04:00Fung,
You can believe whatever you want to believe...Fung,<br />You can believe whatever you want to believe but I have a question for you. Name me the last great growth company that Buffett bought for its growth. I cannot name one. The man is a great investor in his space, which is mature, cash-generating companies with solid moats but don't give him credit for things he does not do. The face that he really likes and gets along with Bill Gates does not obscure the reality that he never invested in Microsoft when it was a great growth company. If he invests in it now, it is only because it has become a cash cow (and that is my point about IBM as well).Aswath Damodaranhttps://www.blogger.com/profile/12021594649672906878noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-13716421493432547362016-05-30T01:44:12.440-04:002016-05-30T01:44:12.440-04:00Prof,
Thanks for your response, although I think ...Prof,<br /><br />Thanks for your response, although I think the topic was slightly deviated. <br /><br />I think Mr. Buffett's reluctance to buy Facebook or Amazon has nothing to do with his valuation method, but rather his understanding in those businesses. He speaks highly on Bezos nowadays and he might finally got some clues on how to value Amazon, but it's too late to lay a dime. <br /><br />On IBM, I'm pretty sure that most of Berkshire's subsidiaries are IBM's clients and Mr. Buffett knows very well how sticky his subsidiaries are to IBM. Given Berkshire's size, IBM is a decent investment - 3% dividend yield for a USD13.8 billion investment = USD421 million income (and growing). Tell me if you can find a better deal today if you have USD13.8 billion to deploy. (Todd and Ted think Apple is the answer)<br /><br />Many people forgot that Berkshire's opportunity costs are getting lower and lower due to its size (same goes to Apple), so they bashed Mr. Buffett for buying IBM. Try putting on his cap and you'll why he has no choice.Betronisthttps://www.blogger.com/profile/06214864059300244383noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-80518015999478695262016-05-28T14:01:28.071-04:002016-05-28T14:01:28.071-04:00Hello Prof. Damodaran,
Agree with your comment t...Hello Prof. Damodaran,<br /><br /><br />Agree with your comment that if one used "old-time" investing techniques, companies like Amazon and Facebook would have been ignored. Heck, even Apple in the late 90's would have been ignored.<br /><br />Must admit, I should have loaded up on Facebook when the share price was in late teen's about 18+ months ago. That's my current regret. That company similar to Apple is a cash-cow and I don't use that term in any negative way. <br /><br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-73990004207250109112016-05-28T08:31:30.597-04:002016-05-28T08:31:30.597-04:00Fung,
In this case, Warren Buffett is not wrong bu...Fung,<br />In this case, Warren Buffett is not wrong but he is being narrow in his approach. His approach, supposedly based upon the risk free rate as the discount rate and "predictable" owners' earnings as cash flows, is a version of DCF called certainty equivalent valuation (he does not call it that, but that is what it is). It may actually work if the only companies you ever value (and thus even look at) are mature or over-the-hill companies. Not surprisingly, if you try to to use Buffett's approach on a Facebook or a Google, it will never be cheap. Take a look at Berkshire Hathaway's portfolio over time and you see the consequences. They will keep loading up on IBM but have never ever held Amazon and Facebook at any point in time. The world of old-time value investing is shrinking by the day.Aswath Damodaranhttps://www.blogger.com/profile/12021594649672906878noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-12887891426487111012016-05-24T23:55:57.757-04:002016-05-24T23:55:57.757-04:00Unfortunately all this mathematical precision and ...Unfortunately all this mathematical precision and numerical analysis is completely irrelevant, in fact dangerous in valuation and success in investing in any stock. Too much brain power dedicated to things that are of virtually zero importance.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-904470124663383542016-05-24T06:04:24.458-04:002016-05-24T06:04:24.458-04:00Awesome! Loving your work all the way from Aucklan...Awesome! Loving your work all the way from Auckland, NZ. Keep it coming and make a visit down here one day.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-87340652699440286322016-05-24T02:22:46.190-04:002016-05-24T02:22:46.190-04:00Prof,
Sorry for the bad presentation of my idea.
...Prof,<br /><br />Sorry for the bad presentation of my idea.<br /><br />I was actually saying that...<br /><br /><i>Apple has too much cash to spend, hence it is hard for them to find enough opportunities to generate adequate returns (a.k.a. "The Berkshire-Hathaway Problem")</i><br /><br />not...<br /><br /><i>Apple will make bad investments because they have too much to spend</i><br /><br />I don't think Apple's investment/capex acumen is bad. In fact, I think they are over prudent in deploying their cash. If they keep piling up their cash at this rate without making any significant $10-50bilion-ish investment and still not paying out the profits they don't need, Apple will become a 'cash company' in 1-2 years.<br /><br />IMO, I think Apple should pay out 100% of their future earnings because they have more than enough cash to fund growth.<br /><br />Bottom-line: I value Apple's cash at discount because there's nothing much they can do with it. The cash pile is simply too huge.Betronisthttps://www.blogger.com/profile/06214864059300244383noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-16927812662700325722016-05-23T23:54:17.140-04:002016-05-23T23:54:17.140-04:00Fung,
I am puzzled since you seem to be making the...Fung,<br />I am puzzled since you seem to be making the same point that I am. If you believe that Apple, if it tries to invest its cash in new businesses/investments is likely to be making bad investments, are you not also saying that your biggest fear is that Apple will try to do too much with its cash, not too little?Aswath Damodaranhttps://www.blogger.com/profile/12021594649672906878noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-35031697820568265672016-05-23T23:06:50.812-04:002016-05-23T23:06:50.812-04:00Prof,
With all due respect, I think your belief t...Prof,<br /><br />With all due respect, I think your belief that Apple will try to do too much with its cash, not too little, is unsound.<br /><br />If Apple's $204 billion net-tax cash is a company, it would be the world's 19th largest company in terms of market cap, bigger than Verizon, Novartis and Alibaba.<br /><br />If Berkshire Hathaway has problem in deploying its (growing) $60 billion cash into viable investments, I don't see how Apple not having a bigger similar problem. I mean, spending $100 billion sanely is not easy.<br /> <br />I would value Apple's cash at discount, given its potentially lower returns vs cost of equity. But I may be wrong on Tim Cook.Betronisthttps://www.blogger.com/profile/06214864059300244383noreply@blogger.com