Absolutely love it. It is how i am trying to determine an intrinsic value of a business, that i am confident i know how and where it will be reinvesting the excess capital.
The one thing that looks quite a bit cloudy to me is how the period of reinvestments at above average rates affects the valuation today. For example, there are major differences between business that can reinvest 30% of the excess profits at 20% ROIC for 50 years and one that can Reinvest 30% of the excess pforits at 20% ROIC, but let's say for 20 years.
I wouldn't use less than 10%, especially in today's market. That's only a premium of 5% to safe US Treasuries. Remember, your discount rate is your expected return. If you buy something at say a 7.5% discount rate, at full value you're only going to earn 7.5%. The lower the discount rate the lower return you demand out of your investments, all things being equal. I find 10% is a good floor. But it's a decision up to the analyst.
I see. So the meaning of discount rate here is the benchmark rate you expect for securities of a certain risk level? Like if you were to invest in small caps instead of blue chips, the discount rate should be commensurately higher to compensate for the increased risk?
Some people adjust their discount rate to reflect risk. I just use the same rate (generally 10%) and use the margin of safety to account for risk. I'm okay buying BRK at a slight discount to IV. A company like Medifast demands a huge MOS.
Absolutely love it. It is how i am trying to determine an intrinsic value of a business, that i am confident i know how and where it will be reinvesting the excess capital.
The one thing that looks quite a bit cloudy to me is how the period of reinvestments at above average rates affects the valuation today. For example, there are major differences between business that can reinvest 30% of the excess profits at 20% ROIC for 50 years and one that can Reinvest 30% of the excess pforits at 20% ROIC, but let's say for 20 years.
Have you tried to evaluate that factor?
Thank you for the great content.
My first thought upon seeing the Viscount Rate was that it was "inflation"
hmm, a discount rate of 10% seems a bit steep? the interest given by banks on a savings account is no more than 5%
I wouldn't use less than 10%, especially in today's market. That's only a premium of 5% to safe US Treasuries. Remember, your discount rate is your expected return. If you buy something at say a 7.5% discount rate, at full value you're only going to earn 7.5%. The lower the discount rate the lower return you demand out of your investments, all things being equal. I find 10% is a good floor. But it's a decision up to the analyst.
I see. So the meaning of discount rate here is the benchmark rate you expect for securities of a certain risk level? Like if you were to invest in small caps instead of blue chips, the discount rate should be commensurately higher to compensate for the increased risk?
Some people adjust their discount rate to reflect risk. I just use the same rate (generally 10%) and use the margin of safety to account for risk. I'm okay buying BRK at a slight discount to IV. A company like Medifast demands a huge MOS.
sorry this may be a dumb question. What's IV? Intrinsic value?
There are no dumb questions! Yes, intrinsic value.