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Is the discounted cash flow method similar to the margin of safety analysis in Shares Charting October 2002?

Is the discounted cash flow method similar to the margin of safety analysis in Shares Charting October 2002?

No, they are quite different.

Discounted Cash Flow is a method of valuing a company. In the most simple terms, you estimate the cash flow from the investment out to the end of its expected life. You then bring this cash flow stream to current value by applying an appropriate discount factor. Then the present value of the cash flow stream is summed to give the current value of the investment.

The assumption then is that the company's shares should sell for the current value of the company divided by the number of shares that have been issued.

The margin of safety concept is not strictly a valuation method like discounted cash flow. The discounted cash flow method makes a couple of heroic assumptions. The biggest one is that we can accurately estimate the cash flow out many, many years.

Benjamin Graham believed that this was not possible, and all my experience suggests he was right. So, the best we can do is look at the safety of the investment based on the way the company has been run up to now. If the company has a long-term record of conservative financing and is now selling for far less than the average for the market based on PAST RESULTS, then we can say that there is a fair margin for error.

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