I would like to have somewhat of a debate around the following question: 'Throughout the years and even from its beginning, haven't we skewed valuation models to satisfy our needs instead of trying to find new ways to value companies?'


Inputs appreciated.

my doubt is,why are we still stuck with the same old DCF models when we know they are just garbage in garbage out models.They give us what we want to see.Why havent we worked on building more realistic models that may be incorporate management integrity and a healthy dose of common sense?

One model that has worked out well for me is to have a string of valuation parameters for example PE, RoE, P/BV,Div yield, Management, Industry, Sector Leadership etc etcand then plug in the numbers. The model should be self adjusting for example high RoE would mean high Price to book so the company gets more score in the RoE and less in the price to book; high RoE also means high PE generally so that adjusts there, high yield goes with low Price to book but high RoE and high yield cannot go together, a good management will have a high PE and so will a good industry so that balances each other out again  ultimately we have to weight them and then get to a common number using the goal seek fucntion at excel which equates the numbers alloted and scored at a certain price.

Originally posted by prabhakarkudva my doubt is,why are we still stuck with the same old DCF models when we know they are just garbage in garbage out models.They give us what we want to see.Why havent we worked on building more realistic models that may be incorporate management integrity and a healthy dose of common sense?

Edited by basant - 07/Oct/2009 at 9:22pm

One interesting way to value is just use the last 3-4 years Annual reports  and build your best case for the price you want to pay for this stock.