Investing vs. Speculating

Good feedback:

“This e-mail is in response to postings regarding investing vs. speculating. Morningstar and most fundamental investors brag about relying on discounted cash flow models, looking for ‘good’ companies with predictable cash flow and earnings, etc., which is considered ‘investing’. Talk about fools gold. The only way the DCF model works is if one can predict future cash flow. It is nearly impossible for companies to accurately predict free cash flow for the current year let alone five or ten years into the future. This leaves the analyst to make an assumption of compounded annual growth such as 5%, 10% or more. They might use a statistical basis, such as the company’s previous five year annual growth figure, but as we all know past performance is not an indication of future results. Another wild card is that free cash flow is affected by a company’s capital expenditures. Depending on the economic climate, capital expenditures exhibit swings from year to year that make predicting free cash flow impossible. Recent examples of this bad approach are all of the analysts who relied upon discounted cash flow models in 1998 and 1999 for their favorite dot com ‘investment’ – how do those models look now? The real speculators are those who believe in their own ‘rightness’ and their ability to predict the future. Those who believe them will end up getting what they deserve.”
Bruce Broussely