ValuFocus Investing: A Cash-Loving Contrarian Way to Invest in Stocks

Chapter 11

Suppose You Love Your Current DCF Model

Suppose you really love your current discounted cash flow model.

You learned it in graduate school.

Or on your job.

You've spent years learning its idiosyncrasies. You don't want to give up those insights.

You are naturally suspicious of any model that claims to be better than yours.

Yet, you want to remain open to new ideas. And you always wondered about all these models.

We wrote this chapter just for you.

When we are honest with ourselves, we confess that we all “build on the shoulders of giants.” We take a little idea here. We take a little idea there. Eventually, we combine the ideas into a consistent whole. We connect the dots.

In this chapter we describe briefly the most recognized discounted cash flow models and provide you many of the best references known to us on them.

So, you can decide which ones are best to use for valuation and stock selection.

We do make one recommendation. At the Boston Consulting Group, we were fond of saying, “Facts are our friends.” In this vein, ponder applying the core measurement principles of robustness, accuracy, nonbias, and predictive capability to your favorite model. Across the entire universe. For a decade or more.

Chapter 14, “Our Automate DCF Model—The Better Model” and Chapter 30, “Comparing Our Model against Three Popular DDMs” cover these core measurement principles on the details of how to produce a good model.

If you think that there are better measurement principles, employ ...