Mental Models discussed in this podcast:
- Terminal Value
- Intrinsic Value
- True Historic Value
- Discounted Cash Flow Calculation
- Net Present Value
- Fog of War
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You can find out more information by listening to episode 11 of this podcast.
Why does Intrinsic Value grow over time?
There are multiple ways to answer this question.
- It doesn’t. Intrinsic value is fixed, but your estimate of intrinsic value will change.
- Your assumptions were wrong because you made a mistake.
- Your assumptions were wrong because you can now see more of the future.
- A year moved from being inside Terminal Value to inside your forecast range.
What is Terminal Value?
- How is it calculated?
- Why does it matter?
- Terminal Value is the net present value of all future cash flows discounted back to a specific year in the future. (Perhaps 5 or 10 years from now)
- In other words, Terminal Value is your estimate of the Intrinsic Value of a stock 10 years from now.
- As each year passes, the “fog of war” that is the future becomes illuminated. That means that we can now *SEE* the future.
- Concept: True Historic Value
Terminal Value is the net present value of all future cash flows discounted back to a specific year in the future. Intrinsic value is fixed, but your estimate of intrinsic value will change over time.
In addition, you can evaluate how the intrinsic value of a company has changed over time in the past by calculating the True Historic Value. This value is the intrinsic value at a past date assuming 10% future annualized returns all the way to the present.