“Big idea” from DCF thinking


Buffett said “I don’t do DCF”, but he also says he does a rough approximation in his mind – of course he does.

Given the simple fact that, depending on the circumstance, terminal value can constitute approximately three quarters of the value in a 5-yr DCF and 50% in a 10-yr DCF, how a business should be worth in 5 yrs is more important than anything in between now and the 5th year.

As a result, the focus from “business + people + valuation”  approach is on a business’ durability and sustainability of its growth beyond the 5th year or longer, the management team’s commitment and capability to deliver long term return for shareholders and lastly, if not the least, terminal valuation multiple the market would be willing tot pay for the business at the 5th year or beyond.

And it is for this very reason that we investors need to develop our circle of competence  and circle of contact network for continuous learning of a specific sector or business.

If we do this, ideas we find will, and should, be big ideas, which are ideal objective for a long term investor.

The potential source of “big ideas”, therefore, will have to be as follows:

– innovation (tech, healthcare, etc.) or new products

– big market potential (consumption, service, etc.) or new market entry

– asset revaluation (inflation, policy, etc.) or event-driven (corporate, regulatory, balance sheet, M&A, etc.)


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