| It wasn't useless for Warren Buffett... It's hard to predict future revenues of a startup. But it's not that difficult to get pretty close - looking a few years into the future - for big, established companies like Coke and Pepsi and GM. The Fed gives investors a 2 year outlook on interest rates. In the last 20 years, they have only ever lowered rates by surprise - and that pushes share prices up. You're highly unlikely to lose a lot of money getting surprised by interest rate moves. Sure - anything can happen, but historically, over a 3-5 year period, Coke's revenue and profit hasn't been very volatile. But the share price IS much more volatile. This is what you arbitrage on. The people who are investing in the moment, when you're investing for a longer horizon. Basically, this strategy is that the short term is much harder to predict than the medium term. I think everyone is in agreement that the very long term (for stocks) is pretty hard to predict. |
Buffet doesn’t use DCF:
Charlie Munger said at the 1996 Berkshire Hathaway Annual Meeting: "Warren talks about these discounted cash flows. I've never seen him do one." "It's true," replied Buffett. "If (the value of a company) doesn't just scream out at you, it's too close."
Buffet says “The question is, how many birds are in the bush? What is the discount rate? How confident are you that you'll get [the bird]? Et cetera. That's what we do. If you need to use a computer or calculator to figure it out, you shouldn't [buy the investment]. Those types of [situations] fall into the "too-hard" bucket. It should be obvious. It should shout at you, without all the spreadsheets. We see something better.”
https://seekingalpha.com/instablog/5969741-the-value-pendulu...