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Share Your Valuation Models?


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Your valuation spreadsheet appears to be rather complicated to my mind, but it's useful that you look at the Margin of Safety versus different valuation metrics, (DCF, Book Value etc.).


I'd be a little worried about the sensitivity to changes in certain input variables and how it might fool me with its apparent high precision when a small change in certain inputs could drastically change the valuation it produces. I'd then want to understand what magnitude of valuation it's providing and what expected return that ought to provide, and thus how big a margin of safety I should demand for my buy price in order to generate excess returns.


Although I understand DCFs and know the formulae needed by heart, I'm reluctant to rely on them (and especially reluctant with low or modest discount rates), as they tend to be sensitive enough to enable me to justify any price I choose by tweaking certain variables.


I'd rather build a much simpler model for each company depending on my knowledge of its characteristics over the long term and how I'd conservatively project its future in a couple of scenarios (usually a typical and a low performance scenario).


Sometimes after the qualitative analysis, my low performance scenario is for roughly flat earnings for many years, and where EPS is similar to FCF, I might even choose a simple historic E/P yield or P/E ratio to find a buy price that seems to offer an adequately high return given the effects of the expected dividend yield and stock buyback program. If the company performs according to the typical scenario instead, then I'm likely to benefit from growth in EPS and growth in P/E ratio and earn a superior return than my low performance projection.


Where a company is likely to grow or shrink FCF or Book Value substantially over many years, it gets harder to gauge these simple ratios, but one has to adjust them somewhat to compensate. There are also cases where companies return large amounts of un-needed capital fairly regularly by special dividend (e.g. Lancashire Reinsurance). Again, a somewhat different model may be required.

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