People who don’t build DCF Models are sloppy retail investors with an IQ of a Worm

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Building a Discounted Cash Flow (“DCF”) model will make you look very smart and not dumb at all.  DCF models are only for the most educated and analytical finance gurus out there and if you don’t build one you probably haven’t even passed the CFA Level One.  People who don’t build DCF models are sloppy retail investors with an IQ of a worm.

The best thing about building a multi-segment DCF model is how smart you will look.  Building a DCF model is comparable to building rockets and sending them to space but much harder and smarter.  Once you build a DCF model your IQ is likely to increase by at least 25 points.  Also, the next time you are at a bar you can impress people with how smart and not dumb by telling them that you are a skilled DCF master – this will get you laid all of the time.  Chicks dig dudes who can DCF.

When you build a DCF model you can literally put in any data you want!  For an example, if a company I am modeling out has really bad financials I will just take the financials from a good company and substitute them for the bad company.  This will improve your valuation and almost always give instant upside.  Substituting financials from a good company to a bad company is called value investing.  Everyone does this and if you don’t do this then you must be an idiot who doesn’t have an MBA.

One thing I learned from taking the CFA Level Three is how noble building a DCF model is.  People who build DCF models literally save small starving children.  Doctors and firefighters look up to DCF masters and DCF masters look down upon doctors and firefighters because they are dumb and not smart.  Plus, when you are at a grocery store and a poor lady is bagging your groceries you can yell at them for being slow and incompetent because you are much smarter than richer than them and they are poor.

The best trick I learned when building a DCF model is to set your terminal EBITDA multiple at 10,000x, at least.  This will ensure the stock you are valuing will be a ten thousand bagger and give you really good upside.  Another way to get a lot of upside in a stock is to use a really low discount rate like 0.0000001%.  Discounting your cash flows at a really low discount rate is called having a CFA Level Two and will give you huge upside.  Another great way to get huge upside is to decrease the capex needs of a company to zero.  Companies really don’t need to spend capex because that is a waste of capital and just an accounting number that bald virgin accountants make up.  Since you are a CFA you can start making up numbers too because that is what smart finance guys do.

When you are analyzing a really complicated company that has lots of macroeconomic drivers just ignore them.  Complicated macroeconomic factors are really annoying and are confusing.  If you ignore them, you won’t have to deal with them.  It is like putting black tape over the lights in your dashboard on your car when they come on.  Ignoring the macroeconomic drivers of a business is called margin of safety investing.  You are protecting your downside by not knowing about them.  

Overall the benefits of building a DCF model are so many I could probably count them on one hand.

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Source of featured image: Esquire



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