By
Borsgade
In this article, Michael Mauboussin argues that whenever investors value a stake in a cash-generating asset, they are essentially using a discounted cash flow (DCF) model, whether explicitly or implicitly. This concept applies broadly across various asset classes and investment strategies. Although few investors explicitly use DCF models all the time, keeping the drivers of the model in mind is essential for understanding and evaluating investments across various asset classes.
Based on this conclusion, Michael introduces the mantra “everything is a DCF model”. He explains that the intrinsic value of an asset is determined by the present value of its future cash flows. This principle applies to a wide range of investments, including stocks, bonds, real estate, and private equity. Even when investors use shortcuts or heuristics for valuation.
Here are the Key takeaways:
The value of an asset that produces cash is the present value of the cash flows it generates over its life. Few investors explicitly use a DCF model all the time, but it is useful to keep the drivers of the model in mind constantly.
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