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Author: TMFBogey Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 18386  
Subject: Re: Ben Graham's Equation Date: 10/31/2001 4:14 PM
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<<it's ad hoc and doesn't account for risk >>

Snoop,

I think "strongly recommending against this equation" is a little strong. It's certainly not going to hurt for people to investigate it for themselves and understand the underpinnings of it. I'm with you, though, it is not the be all and end all.

<<You can start and stop with discounted cash flow analysis>>

Hello Mr. Pot, I'm Mr. Kettle. ;) That sounds an awful lot like "the world is flat."

I was talking with Bill Mann today and we were discussing discounted cash flow analsysis. The problem with DCF, in my mind, is that with so many proponents of it, everyone is looking at it. It's not like a company's intrinsic value is the great unknown to people who follow DCF religiously.

The real problem is that the risk you assume has little or nothing to do with running a solid DCF because truly undervalued companies by traditional DCF standards are ONLY undervalued because there is doubt amongst market participants as to whether the future cash flows can remain in tact.

Philip Morris is a perfect case in point. By all traditional DCF measures, it's been dirt cheap for some time now, and especially last year. The real risk that you took was whether those cash flows would remain in tact. That's where the risk is assumed, at least for most large companies that are widely followed.

I challenge you to show me a single company that's trading at a significant discount to future cash flows where the predictability or even stability of those cash flows isn't in doubt.

While DCF needs to be in the holster, it too is not the be all and end all.

My 2 cents,

Bogey
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