Help me refine my DCF
Gentlemen,
allow me to share some personal habits and question i have about my process of investing, and feel free to opine as harshly as you desire. Well thought out replies are highly appreciated.
a) For terminal growth, i use the fed funds rate. My rationale behind this is, that a company should be able to grow its earnings by at least the fed funds rate.
b) However, i dislike that Terminal Value is somewhat "overproportional" in my basic DCF. Should i complicate the math to give more weight to near-term results, or is this a path down the wrong direction? Im somewhat hesitant to "tweak" my models, and think my time is better spent thinking about the business, but i still heavily rely on my DCF model to make decisions.
c) How do you gentlemen think about fair value in general. Your DCF provides you with a fair value price for one share. If you can buy that stock at fair value, you would achieve your desired return you defined as your equity risk premium within your discount rate, correct? Ideally, you can have a margin of safety -- buying below fair value. How do you think about this? What company would you buy at fair value, what company would you only buy at a considerable additional discount to fair value?
d) In addition to c), how do you think about time in respect to holding the position. Lets propose you have a fair value of a company at $20, and its trading at $10 a share. How patient are you for Mister Market to turn in your direction, given that the longer the market needs to see what you see, the worse the investment gets, no?