I believe checking the percentage of terminal value (TV) relative to the total discounted cash flow (DCF) is a crucial sanity check. One approach is to solve for the discount rate and prioritize investments with higher internal rates of return (IRR), which naturally reduces the reliance on terminal value.
I disagree with Michael Mauboussin on forecasting beyond 10 years. That often leads to the illusion of precision. For example, in 2015, who could have confidently predicted that Microsoft would play well the cloud game and lead the AI revolution? Or how Intel and Nvidia would evolve? History shows that the top 10 companies change dramatically every decade—remaining at the top is the exception, not the rule.
Thanks for your comment and glad you liked it. I agree it's difficult to forecast beyond 10 years, but your Microsoft example may not be valid for all companies. Yes, forecasting in the tech sector is particularly difficult, but forecasting beyond 10 years for a company like Costco is reasonable in my opinion.
I agree. However, it’s not necessarily about predicting what will happen, but rather forecasting what you find reasonable or what you’re comfortable with.
The point is not to predict. It's to make assumptions you're comfortable with. You're never going to be right when forecasting, whether you're forecasting just 5 years or 30 years.
This was absolutely full of insight, thank you so much.
Keep up the great work my friend!
Thanks, I'm glad you found it useful!
Great article with plenty of solid points!
I believe checking the percentage of terminal value (TV) relative to the total discounted cash flow (DCF) is a crucial sanity check. One approach is to solve for the discount rate and prioritize investments with higher internal rates of return (IRR), which naturally reduces the reliance on terminal value.
I disagree with Michael Mauboussin on forecasting beyond 10 years. That often leads to the illusion of precision. For example, in 2015, who could have confidently predicted that Microsoft would play well the cloud game and lead the AI revolution? Or how Intel and Nvidia would evolve? History shows that the top 10 companies change dramatically every decade—remaining at the top is the exception, not the rule.
Thanks for your comment and glad you liked it. I agree it's difficult to forecast beyond 10 years, but your Microsoft example may not be valid for all companies. Yes, forecasting in the tech sector is particularly difficult, but forecasting beyond 10 years for a company like Costco is reasonable in my opinion.
Yes but still "It's tough to make predictions, especially about the future."
I agree. However, it’s not necessarily about predicting what will happen, but rather forecasting what you find reasonable or what you’re comfortable with.
In an uncertain world, predicting 20 years seems exaggerated to me. I can barely handle 3 years of estimates, ha!
I'll repeat my answer to your note:
The point is not to predict. It's to make assumptions you're comfortable with. You're never going to be right when forecasting, whether you're forecasting just 5 years or 30 years.
Tell me, how do you approach valuation?