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> DCF is still perfectly applicable, nothing fundamental has changed. You can easily include growth into a DCF valuation. You know what makes the price of an a

by GDC7 5y ago

> DCF is still perfectly applicable, nothing fundamental has changed. You can easily include growth into a DCF valuation. You know what makes the price of an asset? Whatever is going on in market participants brains who are bidding/asking it. DCF works somewhat because there is a certain % of market participants which uses it to determine whether to buy or sell. It doesn't work per se, it's a signal, like a sunny day NYC or the Yankees winning the night before.

RivieraKid 5y ago
I'm talking about valuation, not market price. The longer your time horizon is, the less you are dependent on the rationality of other market participants (which is quite high on average). You can just sit back and collect the cash flows, no need to sell.
- GDC7 5y ago
  Valuation for valuation's sake is kinda pointless, at the end of the day you cannot spend valuation. You spend money. Even in the long term the money you earn from your investment is dependant upon the opinion of other people. You don't know what parameter they'd use to justify to themselves their position when they decide to go long or short a particular stock or index. By the same token you don't know what parameter will people use to justify purchasing/not purchasing that particular item or service. Markets are not about companies, they are about people, because they place the bets, whether they are financial bets or betting that a good or a service will improve their quality of life.
  - RivieraKid 5y ago
    Stock prices gravitate towards valuations in the long-term. This is an empirical fact, markets are fairly rational. And even if this wasn't the case, I can just collect the dividends and ignore what the market thinks. A valuation is basically the total value of all future expected payments to investors. Each expected payment is discounted to account for time and risk, but let's use a discount rate of 0% for simplicity. Let's say you have a farm, which is expected to pay $1B to investors over the next 10 years and then cease operation. The valuation is $10B. What if the market thinks this company is worth just $2B, is it such a big problem? No, if my valuation is correct, I can just wait 10 years and collect the $10B.
    - GDC7 5y ago
      > Let's say you have a farm, which is expected to pay $1B to investors over the next 10 years and then cease operation Expected by whom? Who gives you the certanety that they'd pay 1B/yr ? The CEO projections? That's just like marketing material Let's say you come up with your own projections and indeed it points at a 1B/yr profit. At the end of the day you are still looking at the past/present and trying to predict the future thoughts and actions of people other than yourself. You are making a prediction/bet that people other than yourself will buy some X billions dollar worth of the farm products and that the difference between revenues and cost of good sold is going to come out at 1B per year which is the profit which at the end of the 10 years it totals 10B
      - RivieraKid 5y ago
        By the person doing the valuation. There's no certainty, it's an expected value of the assumed probability distribution, which is why each cash flow is discounted - because it's not certain. Yes, valuation is about predicting future profits which depends on what people will buy etc. For example, I predict that people will continue to buy Coca-Cola in roughly the same volumes as they do today.
        GDC7 5y ago
        > For example, I predict that people will continue to buy Coca-Cola in roughly the same volumes as they do today. And people before us swore by the fact that people would keep buying cigarettes in the same quantities.
        RivieraKid 5y ago
        I know nothing about that but in general, prediction and therefore valuation is not easy.

by GDC7 5y ago

RivieraKid 5y ago

I'm talking about valuation, not market price. The longer your time horizon is, the less you are dependent on the rationality of other market participants (which is quite high on average). You can just sit back and collect the cash flows, no need to sell.

GDC7 5y ago
Valuation for valuation's sake is kinda pointless, at the end of the day you cannot spend valuation. You spend money. Even in the long term the money you earn from your investment is dependant upon the opinion of other people. You don't know what parameter they'd use to justify to themselves their position when they decide to go long or short a particular stock or index. By the same token you don't know what parameter will people use to justify purchasing/not purchasing that particular item or service. Markets are not about companies, they are about people, because they place the bets, whether they are financial bets or betting that a good or a service will improve their quality of life.
- RivieraKid 5y ago
  Stock prices gravitate towards valuations in the long-term. This is an empirical fact, markets are fairly rational. And even if this wasn't the case, I can just collect the dividends and ignore what the market thinks. A valuation is basically the total value of all future expected payments to investors. Each expected payment is discounted to account for time and risk, but let's use a discount rate of 0% for simplicity. Let's say you have a farm, which is expected to pay $1B to investors over the next 10 years and then cease operation. The valuation is $10B. What if the market thinks this company is worth just $2B, is it such a big problem? No, if my valuation is correct, I can just wait 10 years and collect the $10B.
  - GDC7 5y ago
    > Let's say you have a farm, which is expected to pay $1B to investors over the next 10 years and then cease operation Expected by whom? Who gives you the certanety that they'd pay 1B/yr ? The CEO projections? That's just like marketing material Let's say you come up with your own projections and indeed it points at a 1B/yr profit. At the end of the day you are still looking at the past/present and trying to predict the future thoughts and actions of people other than yourself. You are making a prediction/bet that people other than yourself will buy some X billions dollar worth of the farm products and that the difference between revenues and cost of good sold is going to come out at 1B per year which is the profit which at the end of the 10 years it totals 10B
    - RivieraKid 5y ago
      By the person doing the valuation. There's no certainty, it's an expected value of the assumed probability distribution, which is why each cash flow is discounted - because it's not certain. Yes, valuation is about predicting future profits which depends on what people will buy etc. For example, I predict that people will continue to buy Coca-Cola in roughly the same volumes as they do today.
      - GDC7 5y ago
        > For example, I predict that people will continue to buy Coca-Cola in roughly the same volumes as they do today. And people before us swore by the fact that people would keep buying cigarettes in the same quantities.
        RivieraKid 5y ago
        I know nothing about that but in general, prediction and therefore valuation is not easy.