Valuation Techniques: Discounted Cash Flow, Earnings Quality, Measures of Value Added, and Real Options

OWNING AN ENTERPRISE PRESERVES PURCHASING POWER

To preserve purchasing power, investors need to not only avoid permanent impairment of capital but also to keep pace with the continual growth of human potential. Investing in a business enterprise allows investors to participate in humanity’s capacity to continue improving.

The growth in human potential can be measured by numerous improvements over time: the mechanics of trade over roads, rails, and ports; the faster diffusion of ideas, from the speed of a horse to the speed of microprocessors and routers; the potential for greater energy productivity harnessing solar, wind, and nuclear power versus burning timber, coal, and oil; the increased life expectancy through biotechnology and public health initiatives; and the broadening of property rights.

Preserving purchasing power in real terms is not only about participating in the march of man but also about keeping pace with a monetary stock that is growing steadily. In a world of inflation-targeting orthodoxy, modest deflation is not deemed an acceptable outcome. The central banks of advanced economies are practicing some unconventional monetary “therapy” to try to sustain a rising monetary stock. For example, the U.S. Federal Reserve is trying to put a floor under U.S. inflation, a policy that is producing commensurately greater inflationary pressures in the emerging markets, which are U.S. dollar reserve currency accumulators. As a result, Brazil, Russia, India, and China (the ...