Some Final Tips

Some Follies of DCF Analysis

The DCF model is only as good as the assumptions which are fed to it.

DCF model requires us to predict the future cash flow and the business cycles. This can possibly be well off the actual number in future.
DCF model is highly sensitive to the terminal growth rate. A small change in the terminal growth rate would lead to a large difference in the final output i.e. the per share value.
The inputs (annual results) and the assumptions (interest/growth rates) of the DCF model needs to be updated on a regular basis.
DCF is heavily focused on long term investing, and thus it does not offer anything to investors who have a short term focus. (i.e. 1 year investment horizon)

As we saw some possibility for errors in the DCF models, here are some guidelines to minimize these errors.

FCF growth rate should be around (conservatively less than) 20%.
Longer duration for future FCF estimation is better but also more prone to errors.
2 stage growth rates is a good approximation. The first half has higher growth rate than the later half.
DCF is very sensitive to terminal growth rate. Preferably keep lower than 4%.

The intrinsic value band of +/- 10% to the calculated share price accounts for errors.
Another layer of safety can be added by further reducing the band by 20~30% of the value for a conservative final share price.

A conservative range for no. of stocks in portfolio is around 10~20 depending on your capacity to involve in the regular monitoring of the stocks.

Avoid IPOs, they are generally overpriced.