Buffett / Munger just pick a number, Bruce Greenwald just picks a number
Then Damodaran is there, doing beta regression and all that false precision.
If you do DCF, what discount rate do you use and what's your thought process?
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What's Bruce Greenwald's approach to picking his discount rate again? It's been a while since I read him, remind me kindly. Not his Earning Power Valuation yea?
Did you attend CBS?
He just picks a number, like a hurdle rate the investment needs to make for him. Say 15%.
I didn't attend CBS.
Cool. The old guard just do it like that.
you run into a problem when doing this - with the terminal value. You have to use what the market is thinking the discount rate is.
I see what Bloomberg says the wacc is, see if it seems reasonable, and if it does, use that.
IMO getting super caught up in discount rates is a fools errand, not bc it isn’t important, but bc the quality of your forecasts is much more important.
You guys are doing DCFs? We usually just IRR to an exit multiple in the terminal year
Does DCF actually matter? Depending on discount rate assumption you can get vastly different results, so whatever number you get has a lot of statistical uncertainty attached to it. Can it be used as a tool to justify your other convictions, yes but seems like a confirmation bias machine than anything else.
It's a genuine question and I don't have industry experience so apologies if it seems off.
You are a research analyst at a HF but you don't know if people use DCF?
Not in my asset class. I know it's used the question is *should* it be used, intern.
There's no way around it unless you fundamentally don't believe in time value of money and risk.
Any valuation technique you use involves a discount rate, either explicitly or implicitly
This is why most people at HFs prefer to use a multiples-based approach.
DCF is seen as a sanity check at best and an academic exercise at worst.
My boss has a custom formula or process, which ends up being directionally in-line with the bloomberg WACC.
Specific number you use as discount rate doesn't matter much, and you can always sensitize results across different rates.
My thoughts in general about DCFs... which TLDR is probably just mauboussin's "everything is a DCF"
We know one discrete ouput from a DCF as a price target isn't that meaningful. What is meaningful, is 1) being forced to explicitly make assumptions about a business over a longer term horizon, and 2) flexing the DCF across different ranges.
These ranges are a sort of benchmark of where valuations can head for the business depending on where results and perception are trending. While it is somewhat obvious, it shows you why a company that grows 10% a year can be worth 30x while one that grows 2% can be worth 11x; which can be helpful if you are thinking about what do the next few earnings results translate into perception wise (do people think this company looks like a 10% EPS grower or 5% EPS grower). You can always back out the implied rates of a multiple, but I think making those forecasts over longer periods of time can be good as well. Not that the forecasts will be accurate or easy to diligence, but forcing you to think about the model in that framework and how it relates to valuation certainly has its place.
Just an extension of slapping multiples onto any forecasts or looking at the 3yr IRR; who else will view the business this way and why?
And then obviously has its place at longer term LOs putting together a mix of well balanced risk/rewards or stocks trading "cheaply" or w/e; less exciting than the company with an underappreciated pending inflection (trades peak to peak at 40x!)
I work in valuation, typically we have two methods: simplified. For debt we typically do a yield calibration where we derive the IRR as of the investment date then adjust it for company and market adjustments. For equity position, we typically do a WACC buildup with an equity risk premium, risk free rate, beta, etc.
Damodaran doesn’t actually like regressions - if you watch his videos he’s explicit about this. The beta of an asset is just what portion of this assets cost is fixed vs variable. I can tell you the approximate beta of any business from this simple proposition. A company with high variable costs (tech) will have a higher beta than a company with lower variable costs (industrials).
If you want to get rid of the beta idea you implicitly have to ditch the CAPM… if you have better ideas on how to estimate Required Rate of Equity Return go ahead, but the general consensus is that it’s ’good enough’.
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