Why do expectations matter so much? Because predicting the future has to be really precise to serve as a reliable basis for building a new plant or otherwise undertaking “I” investment. The following is from an online discussion forum in which someone claims to have “the” value for a company, or rather the publicly traded shares in it.
… Always be skeptical! …
A wise man once said: In theory, there’s no difference between theory and practice; in practice, there is.
It’s true, the fair value of a company is based on how much cash it can generate over its lifetime. But it’s impossible to even roughly estimate this cash generation. The discount rate is also difficult to estimate, and somewhat subjective.
If you’re off by even 1% on any of your assumptions, your fair value estimate can be off by as much as 50+%, depending on how far out your estimate is.
My advice: Beware of delusional Tesla bulls bearing discounted cash flow models.
09 Nov 2017, 11:59 AM
Boris Marjanovic, [Seeking Alpha] Marketplace Contributor
The bottom line: you can use formal spreadsheet analysis to highlight assumptions, but in the end the yes/go is based on the expectations of senior management for which scenario is likely, and which (money-losing) scenarios are unlikely. Because such managers read the same publications and interact with each other and give interviews, investment “I” in our macroeconomic sense (and investment in the little “i” stock market sense) reflects social behavior and correlates across firms and individuals. Always be skeptical!