James Montier on DCF
August 13, 2010 7:39 pm by Dean Morel
James Montier is my current favourite author. As I won’t have much time to post here until later in the year I can recommend no-one more heartily than James Montier.
Theoretically, discounted cash flow (DCF) is the correct way of valuing an asset. However, as Yogi Berra noted, “In theory there is no difference between theory and practice. In practice there is.” The implementation of a DCF is riddled with problems. First off, we can’t forecast, which kind of puts the kibosh on the whole exercise. Even if we choose to ignore this inconvenient truth, problems with the discount rate still make a mockery of the whole idea of DCF. No wonder DCF has such a poor reputation. The good news is that several alternatives exist. We explore three that avoid forecasting altogether! via Simoleonsense PDF that is worth reading and re-reading.
One day I’ll post my reverse DCF spreadsheet. For those who haven’t read any of Montier’s books or musing I recommend you add his blog to your list and do a web search for more of his articles.
Montier now works at GMO, so the one link gets you Grantham and Montier. I’d pay to work with the GMO team!
No related posts.
Hi Dean, great article. Looks like you were right about BP! I had a look at the GMO Australia update and they underperformed the index in Australia by 0.8% last quarter. Great company, but I guess it’s hard to outperform consistently.
Dean, if you haven’t already I suggest you buy Montier’s book the Little Book of Behavioural Investing, an easy yet interesting read (it will also help for Level 3 of the CFA when you get there, speaking of which are you still doing Level 1 in December?)
Thanks Justin, I’ve added it to my wish list. I read and really enjoyed Montier’s “Value Investing” a few months back. It’s brilliantly written and very insightful.
Yes I am still doing CFA Level 1 this December, though my current Uni workload, a trip to Europe and life in general seems to be eating heavily into my study plan.
I hear ya. Keep at it though – last night at about midnight I found out I had passed Level 3. I can’t even begin to describe my feelings of relief (and also of achievement). It’s quite a trip but one that is worth it in the end. Good luck!
Wow Justin. Congratulations, that’s a wonderful achievement.
Thanks Dean!
Leave your response!
SUBSCRIBE by RSS
or Subscribe by EmailTags
Categories
Archives
Free Spreadsheets
Speed Fusion : Twitter
Posting tweet...
Powered by Twitter Tools
Blog of the Day
Blogroll
Aus/NZ Blogroll
Recent Posts
Most Commented
Quotes