Brief Thoughts on DCFs

Figuring out ways to handle the future is no joke. I think DCF models are a good way of dealing with this phenomenon. This thought would perfectly fit into the narrative Terry Smith shared in one of his letters (which I covered):

“The commanding general is well aware that forecasts are no good. However, he needs them for planning purposes.”

Additionally, it forces one to actually draw what they expect the future of a company will look like. Perhaps by doing so, the growth rate and the expenses we think the business could have might get clearer. Otherwise, our own expectancy of the company’s future could remain somehow uncovered. Knowing what we think is much more complicated than it seems and these kinds of practices sometimes help dismantle thoughts and ideas.

Huge however, the chances of having an accurate model are 0 and the sensibility numbers have is ludicrous. If we were to change one single percentage point in the discount rate, the ‘intrinsic value’ we would obtain would be absurdly different. How could one make investment decisions based on such a flawed mechanism?