ValuFocus Investing: A Cash-Loving Contrarian Way to Invest in Stocks

Chapter 14

Our Automated DCF Model—The Better Model

Now we need to come up with the best economic cash flow methodology for valuing a business and its securities—both equity and debt.

We recommend and describe our current working model in this book. The model is continually being refined and improved. We will detail progressive efforts to improve it in a later chapter.

In building our price formation process, we have gone well beyond current discounted cash flow models. Indeed, we examined them closely to identify their limits as an important part of finding ways to build a better model. We describe these comparative studies as well. Identifying the weaknesses of a model is a valuable way to figure out how to improve it.

Our methodology builds from automated discounted cash flow modeling.

First we're going to describe the basis and benefits of an automated model and then describe our methodology specifically. “Automated” essentially means that the model can value any one or a combination of the thousands of companies that the investor selects from the database for study without analyst intervention. This means the investor works from information that forms the construct of the model itself, plus various additional built-in active tools designed to enhance the analysis.

Our LCRT universe at this time consists of approximately 7,000 U.S. companies. We will continue to grow that number, expanding it globally.

A weakness of popular DCF models today is that they can analyze only one ...