tag:blogger.com,1999:blog-8152901575140311047.post6143656950157764826..comments2024-03-18T10:18:19.736-04:00Comments on Musings on Markets: Discounted Cashflow Valuations (DCF): Academic Exercise, Sales Pitch or Investor Tool?Aswath Damodaranhttp://www.blogger.com/profile/12021594649672906878noreply@blogger.comBlogger21125tag:blogger.com,1999:blog-8152901575140311047.post-28430613493331344412015-05-25T09:33:24.897-04:002015-05-25T09:33:24.897-04:00I agree with the Professor that EVA is much harder...I agree with the Professor that EVA is much harder and much more fiddly to use. There are far too many subtle ways to get it wrong than to get it right. The number of times I had gone public with numbers after many corrections only to discover in the middle of a presentation that they were still wrong ... scary. Is it not trademarked to CS/CSFB?psuedonymnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-78426168434362825882015-05-24T15:49:00.357-04:002015-05-24T15:49:00.357-04:00Dan S "probability weight DCF"
This is ...Dan S "probability weight DCF"<br /><br />This is a dangerous concept. A weighted single coin flip for $1 head $0 tail is 50 cents which cannot happen in real life. If you do 100k flips, a weighted outcome of $50k may be a reasonable estimate. Probability weight values belong with large number of samples only.<br /><br />Chris: "I just shake my head in disbelief when analysts tell me that they can model the cash flows for equipment replacements better than the accountant's rough and ready depreciation percentage"<br />Depreciation is driven by rigid accounting rules for book values and tax rules for tax, both according to classes of assets. They rarely coincide with real asset lives. That is not to say that business managers do not game these rules and replace assets before they run out of live span.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-66211556691332042562015-05-24T15:21:12.136-04:002015-05-24T15:21:12.136-04:00"It is undeniable that most discounted cash f..."It is undeniable that most discounted cash flow models suffer from bloat, with layers of detail that we not only don't need, but also make no difference to the ultimate value."<br /><br />I think "bloat" is necessary to deal with the uncertainties and to understand a business/asset/project/investment. Modelling the underlying business by identifying and testing the variables driving the business is crucial. From the perspective of a business manager, without the "bloat" and simplifying the business to just key ratios is like driving blindfolded. A buy or sell side analyst can afford to simplify. She can ditch a stock, but a company cannot reverse an investment so easily.<br /><br />If you get the ratios right, I agree that the complexity makes no difference to value. Surely, how excess returns happen is all about all the things you are trying to do right/well way behind the ratios and you need to start decomposing them to make decisions.<br /><br />The excel tools you provide are very useful. I still need to do the bulk of the work elsewhere to provide the inputs.<br /><br />Most of the time, the "bloated" models are not seen by all the managers let alone the outside world as selling tools, but as tools for decision making. For the outside world, lenders/pms/analysts get a hugely simplified CF model. It is up to them to come up with the DCF (frustratingly the D part is frequently misused with just appearances of methods).Intrinsicnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-61420203858750530892015-03-31T07:01:07.035-04:002015-03-31T07:01:07.035-04:00This is a nice article which will clear doubts fro...This is a nice article which will clear doubts from the minds of the trader and will be useful too.forex tipshttp://www.bestforextips.innoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-63498552356536737992015-03-30T03:28:05.055-04:002015-03-30T03:28:05.055-04:00Sir,
Great post.
Given you are producing an est...Sir,<br /><br />Great post. <br /><br />Given you are producing an estimate, which is likely to be incorrect, how do you feel about scenario analysis, or probability weight DCF?<br /><br />Thank youDan Snoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-8167852482138156322015-02-21T12:25:46.143-05:002015-02-21T12:25:46.143-05:00Chris,
Why would I articulate the reasons you don&...Chris,<br />Why would I articulate the reasons you don't do DCF? That is for you to do. I use DCF. So, I will articulate the reasons I do DCF. You don't. So, you can articulate the reasons you don't. And if your post conveys the reason, you seem to be saying that it is because you think accounting book value is a more reliable starting point. Well, good luck with that!Aswath Damodaranhttps://www.blogger.com/profile/12021594649672906878noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-76803188920662603902015-02-20T19:41:06.315-05:002015-02-20T19:41:06.315-05:00Your article never articulated the reasons why I d...Your article never articulated the reasons why I don't use DCF.<br /><br />(1) It takes too much time. I reject about 50 stocks for one I buy. There is no way I am going to create a DCF model of each. And if I did so, all that effort would invariably 'cause' me to buy the stock because I would than have become so emotionally invested in it.<br /><br />(2) Valuations either model cash or accounting earnings. Both of those have a zillion possible modifications. Before I throw out the accountant's depreciation cost, to replace it with cash flows, I would have to know -for each piece of equipment- how old the equipment is, how much technological improvements have happened since it was bought, how much longer it will last, whether the replacement will be leased or purchased, what the replacement cost will be, etc etc. <br /><br />GMAB. I just shake my head in disbelief when analysts tell me that they can model the cash flows for equipment replacements better than the accountant's rough and ready depreciation percentage.Chrisnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-91960418405697359132015-02-11T12:04:14.522-05:002015-02-11T12:04:14.522-05:00Dr. Damodoran,
Sorry to keep pushing but I left a...Dr. Damodoran,<br /><br />Sorry to keep pushing but I left a comment earlier with regards to terminal growth rates. Again, when working with US domiciled companies with international operations in other faster growing nations, should one still stick to the US government bond rate for terminal growth? My original thought was yes, because of interest rate parity relationships but I'd love to hear your thoughts.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-415580822543545112015-02-11T06:18:07.491-05:002015-02-11T06:18:07.491-05:00Walter,
Since I have no need to heed your call, I ...Walter,<br />Since I have no need to heed your call, I am going to ignore it anyway and continue to teach kids (though many of my kid used to big boys before they came back into my classes). Since you big boys are doing such a good job delivering returns to your stockholders, you obviously don't need me in your midst. <br /><br />P.S: Just because I don't charge people to manage money does not mean that I don't invest money.Aswath Damodaranhttps://www.blogger.com/profile/12021594649672906878noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-59526551789166268652015-02-11T01:46:00.816-05:002015-02-11T01:46:00.816-05:00Mr. Damodaran,
All of this is ok for kids, playin...Mr. Damodaran,<br /><br />All of this is ok for kids, playing around et et, why not come out and swim with the big boys.<br /><br />How about this - I dare you to start your own fund so we can see how you perform for real. Sounds fair?<br /><br />If not you can ignore my call and go back to teaching kidsWalternoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-51493692068815685662015-02-05T14:29:01.578-05:002015-02-05T14:29:01.578-05:00I am sorry but EVA and excess return models are ov...I am sorry but EVA and excess return models are over hyped and over sold. They are not alternatives to DCF but a different way of presenting DCFs. You may gain a little bit of insight into where value is coming from, using these models, when you value mature companies, but if you use them right, they will yield exactly the same values as DCFs. They are not easier to use and in fact are much harder to put into practice, if your company is growing or transitioning.Aswath Damodaranhttps://www.blogger.com/profile/12021594649672906878noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-61107774333114264182015-02-05T08:54:18.452-05:002015-02-05T08:54:18.452-05:00Professor,
A variant of the DCF model that I find...Professor,<br /><br />A variant of the DCF model that I find to be more insightful is the Discounted EVA model. EVA being a form of economic profit. While mathematically equivalent, investors can learn more about a company or asset's prospects by the trend and level of its EVA which cannot be said about cash flow. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-26710478567618051992015-02-04T15:54:09.318-05:002015-02-04T15:54:09.318-05:00Dr. Damodoran,
If you are valuing a domestic firm...Dr. Damodoran,<br /><br />If you are valuing a domestic firm's nominal cash flows that operates in different areas of the world growing at different rates, should we still use the domestic 10 yr as a proxy for terminal growth? I would think so using interest rate parity arguments but I wanted to check. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-26614485626415587762015-02-04T12:08:29.620-05:002015-02-04T12:08:29.620-05:00Hi professor,
I've seen you use residual inco...Hi professor,<br /><br />I've seen you use residual income for two purposes: to value financial companies and to evaluate management (your Jan 9th post). Is there a reason you don't use residual income models to value non-financial businesses?<br /><br />I find myself preferring these types of models over DCF. If you think they're flawed, it would be great to learn why.<br /><br />Thanks!Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-54279292800979713982015-02-03T18:10:50.677-05:002015-02-03T18:10:50.677-05:00Anonymous,
You do know what a myth is, right? The ...Anonymous,<br />You do know what a myth is, right? The notion that a DCF value is useless if the bulk of the value comes from the terminal value is a myth.Aswath Damodaranhttps://www.blogger.com/profile/12021594649672906878noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-19127415254007381972015-02-03T16:07:00.480-05:002015-02-03T16:07:00.480-05:00"If most of your value in a DCF comes from th..."If most of your value in a DCF comes from the terminal value......"<br /><br />I guess you would then disregard any DCF model attempting to value Tesla.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-50807529321167221452015-02-03T14:09:18.825-05:002015-02-03T14:09:18.825-05:00Prof Domadaran,
I am studying for the CFA and loo...Prof Domadaran,<br /><br />I am studying for the CFA and look forward to watching your webcasts as we get into the financial analysis sections of the course.<br /><br />Thanks so much for posting these webcast!Anonymoushttps://www.blogger.com/profile/16359162143194496039noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-38521746380094691232015-02-03T08:49:04.858-05:002015-02-03T08:49:04.858-05:00Dear Aswath,
Thanks for this nice article. I woul...Dear Aswath,<br /><br />Thanks for this nice article. I would have two practical questions, where I would love to hear your opinion:<br /><br />One topic that always arises is the limited scope of comparable companies, both for a multiple-based valuation as well as for the beta derivation. How do you handle this subject, especially when looking at venture / growth companies? Most venture and even growth companies operate in a very specific field (e.g. online retail), whereas the companies publicly trading would typically be active in more than this field (e.g. Amazon - online retail, cloud solutions, logistics etc.). What is your advice on picking a relevant set for the beta? Do you use overall industry groups, for example? <br /><br />The second topic where I would love to hear an opinion you is "rolling" WACCs. I saw in some rare occasions people using a WACC that starts at a higher rate such as 30% in t=1 and interpolates down to 15% in t=3, with explanations such as "the company is in an unusual state" or "the market is only currently in a downturn and will flip in the next 2 years". Is this complete nonsense, or would you give it a try to overcome temporary obstacles?<br /><br />Many thanks and as always, thanks a lot for your interesting blog. <br /><br />Best<br />BenBennoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-21256080917056714182015-02-03T08:04:24.401-05:002015-02-03T08:04:24.401-05:00Hi
I tried to enter the webcast and I was asked fo...Hi<br />I tried to enter the webcast and I was asked for usernameAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-11269519304208359912015-02-03T03:58:34.361-05:002015-02-03T03:58:34.361-05:00Do you monitor if DCF values predict changes in ma...Do you monitor if DCF values predict changes in market values over time and hence are a good valuation guide?<br /> <br />Typically we see DCF values from banks/analysts always have a higher value than public equity market values as the banks use optimistic assumptions. Together with the fact a DCF is a long term valuation and most investors think short to medium term explains why they are not used much.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-52527635081574329962015-02-02T13:30:49.431-05:002015-02-02T13:30:49.431-05:00at what time today?at what time today?Anonymousnoreply@blogger.com