A DCF doesn't require use of a spreadsheet. It also doesn't require complex assumptions.

Buffett does the DCF in his head. A unit economics analysis is a DCF done bottoms up . LTV/CBCV can also be calculated in someone's head or roughly "eyeballed" based on pattern recognition.

Doesn't matter what's the market cap is - micro or large, the quality of any business is never unseen. You screen through the last 5-10 years of balance sheet and cash flows and you'd know what can and cannot compound wealth. Narrative alone is useless. Numbers have to match.

@Dinesh_Sairam @a_basumallick @ashwinidamani Questions that are only answered with time haha.

@a_basumallick @ashwinidamani Just to add - sustainable FCF is a faraway concept for most till (if) they gain scale or innovate/add value. Till then, it's generally always a struggle to manage WC and capacity addition. Wouldn't expect that to change for a while.

It's great fun to find a co. where the nos. don't look good on the face of it (one off issues)

But on a deep dive, switching between consol vs standalone, you find great nos. brewing at subsidiary level

As the one off issues get resolved, overall nos. will start looking amazing

A thread: How to value? 🏦💰❓

Sharing my learnings from my journey so far.

Initially when I started out I used to ignore what anybody would have to say about their style of valuing a business and I would blindly copy what Benjamin Graham’s book, The Intelligent Investor had to say.

Later came a stage where I realized Benjamin style was not working.

Before we get into the learning, here is the background to it:

If you have been following me for the past 1 year you would have noticed how my valuation method has changed.

I used to struggle a lot with valuation and it would be at the back of my mind the whole day thinking what are these investors doing to value. I tried DCF but that didn’t work for me. (Don’t hate me for that, its my personal choice)

I used to attend Bloomberg Quint’s talk on Zoom, message investors, read books, etc. to figure out: How to value? (The frustration had got to a level that I took break from investing for 3-4 weeks)

EXCERCISE, showing how Discount Rates impact Valuation, using $NFLX as an example.

Why?

“Interest rates are to asset prices what gravity is to the apple. When there are low interest rates, there is a very low gravitational pull on asset prices"

--- Warren Buffett

(1/4)

The Futures curve is pricing in 8 Interest rate increases, or +210bp that the ANALYTS at Investment Banks have NOT yet adjusted for in Models

Investment Banks typically use the 10yr Bond, + Equity risk Premium + Beta Adjustment to arrive at a Discount Rate😉

Cont ..

(2/4)

Scenario 1 - Use todays scenario Consensus (Factset) with a 7% Discount Rate, gets +10% upside in Share price for $NFLX to $416 (36.3x P/E)

Yet ...

(3/4)

Scenario 2 - Same Consensus forecast but add 210bp to the Discount Rate. Surprise Surprise😉 Now there is -31% to todays Share price, with a price of $263 (22.9x P/E)

What do you choose 🧐❓

This is why there is always a focus on the 10 Yr Bond, as Equities are priced to Bonds & the cashflow they can generate

Now you can see how sensitive valuations can be to changes in Interest Rates. The Bond Market is pricing in rises, YET Analysts at Investments Banks have not