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Im skeptical whether these types of models can help you make better investment decisions. The fate of a company usually hinges on some fundamental question. Fo
by ArtTimeInvestor 2y ago
Im skeptical whether these types of models can help you make better investment decisions. The fate of a company usually hinges on some fundamental question.
For Apple it is whether they can stay a prominent platform that can capture a significant portion of the value created on it.
For Tesla it is how fast their self driving tech will evolve.
For Google it is whether AI will make search obsolete or more valuable.
- trevzercap 2y agoYeah its an art not a science for sure. Those questions and how you think the answers will play out should inform the inputs you use for your model. DCF modeling is not a silver bullet to predict a stock price thats for sure.
- jb1991 2y agoCounterpoint: Jim Simons
- rahimnathwani 2y agoHFT isn't primarily about fundamental valuation.
- doctorpangloss 2y agoI'm not sure why anyone would invoke Renaissance as an example of anything, giving how little people know about what they concretely do. Seems ironically unscientific of people who admire Jim Simons.
- czbond 2y agoNeither is an equity's price much of the calendar year.
- avarun 2y ago…yes. Which is why OP made the argument that this tool, which helps with fundamental performance, isn’t very useful for calculating an equity’s price target.
- rahimnathwani 2y agoWe should distinguish between: - price (absolute level) - price movements (relative change) Your claim is that an equity's price isn't usually a reflection of fundamental value. On how many days this year (or this decade) was Google's market cap lower than that of Cheesecake Factory? Why?
- czbond 2y agoI was referring to an equities price generally being in a wide band channel of price over a year. I was not suggesting an equity goes wildly below it's intrinsic value often (although it is not uncommon still)
- smabie 2y agoRentec also doesn't do HFT
- rahimnathwani 2y agoYou're right. AIUI Rentec holds positions for minutes or days (or maybe even weeks?), not seconds or less. My general point still stands.
- neeeeees 2y agoQuite the opposite actually. Simons and similar practitioners eschewed fundamental valuation techniques. Buffett is possibly a better example.
- deleted 2y ago[deleted]
- anonu 2y ago> these types of models This is THE way fundamental analysis is done. There are many ways to model - but this is the most robust as you have the most inputs.
- epgui 2y agoI’m not sure why you’re being downvoted, because it’s true. Maybe people just have no idea how “fundamental analysis” works or even what it means? This is how it works. That doesn’t mean you’re going to beat the market, or even make a positive return. But it’s essentially the basic fundamental analysis model.
- anonu 2y agoDunno why the down votes either. I guess people prefer to punt and make gut feel investment decisions rather than empirical modeling.
- jacobsenscott 2y agoYes - it is well known there is no "secret investing sauce" - this has been proven over and over. The only people who tell you otherwise are people with something to sell you, or people who have tricked themselves into believing otherwise. This kind of stuff pops up whenever the market is on a tear.
- throwaway2037 2y agoThe secret sauce is simple: low cost ETFs that track the S&P 500 index. Regular, automatic investments. Go to sleep. Wake up 30/40/50 years later. You will be rich. Warren Buffet supports this idea for retail investors.
- anamax 2y ago> Warren Buffet supports this idea for retail investors. Everything that Buffet says falls into one of two categories: [1] He has no relevant knowledge. [2] He/Berkshire makes money from it. [2] Is the most common. (His railways transport oil. His insurance companies make money from the inheritance tax, a tax that his estate won't pay. Etc.)
- throwaway2037 2y ago> His insurance companies make money from the inheritance tax I don't follow this. Can you explain more? Buffet has been quite clear that he expects low cost index-tracking ETFs to outperform even hedge funds with 2&20 fee structure.
- ijidak 2y agoYour examples are actually edge cases that DCF was never designed to handle. There are lots of investments that are way more boring than Apple, Tesla, and Google, and that should be analyzed with DCF. DCF is more for slow and steadily growing companies that might be undervalued for just a moment because of factors outside of the company's control. Tech companies can be harder to value via DCF, because as you say, there are monumental factors that outweigh historical cash flow trends. This is part of why Warren Buffet historically avoided tech. It is wildly unpredictable from a pure historical cash flow numbers standpoint. DCF is not a crystal ball. The types of questions you're talking about aren't well analyzed by DCF. But something like the fair value of Walmart can absolutely be determined via DCF.
- ArtTimeInvestor 2y agoLet's say you sit down and make a DCF for every company in the S&P 500. Now sort them by how much their current price differs from what you call "fair value". You expect that investing in all of the companies in the upper half of the list will result in a better long-term return than investing in the lower half of the list?
- epgui 2y agoNo, that’s not at all what the parent commenter was saying.