Forums General Discussion Intrinsic Value Course Q&A

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  • ben tamben t Newbie
    Post count: 1

    Hi Stig,

    Firstly, thank you for a great podcast, i have enjoyed all the episodes thoroughly and am re-listening to the past episodes again.

    I had one question for you. With regards to the intrinsic value of the companies that you have done on the show, how do you calculate/determine the probabilities of the different growth scenarios?

    Keep up the great work.


    David FloodDavid Flood Moderator
    Post count: 220

    Hi Ben,

    With regards to estimating the probabilities of the different outcomes, it tends to come down to common sense most of the time.

    Say, you have a company which has grown FCF at 20% for the past ten years, can it do it at 20% for the next ten years?. Highly unlikely since excess profits attract competitors, reversion to the mean comes into play where outpeformance reverts back toward the average, and the law of large numbers means it is hard for the company to keep growing at such a clip as markets become saturated or costs rise as the business scales. There may be instances where a company with a wide moat can keep up this superior performance but we want to err on the side of caution when estimating future growth.

    We would therefore assign a higher probability to earnings which grow closer to revenues which are more stable, as a company matures earnings growth has a habit of reverting back to this kind of rate. Essentially we are assigning a greater probability to the conservative assumption of future growth rather than hoping for a stellar performance to continue. Likewise, we may may assign a small probability to a worst case scenario or raise it if there is a lot of uncertainty, i.e high debt, poor liquidity position, narrowing moat, threat of regulatory intervention etc.

    As Buffett has said, “It is better to be approximately right than precisely wrong.”

    Hope this helps and sorry I can’t be more concrete here but valuation is part science, part art. This is why we consider IV to be a range of value rather than a precise figure.



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