How to Approach Investing - Value Method

Why Investors Use Valuation Approaches

Jul 28, 2021

Finding investment opportunities can feel daunting, especially for newer investors. How do you find new companies? How do you evaluate them? How do you have confidence in your decision? Quick internet searches bring back hundreds of approaches, but one of the most common is valuation techniques.

Valuation techniques have become increasingly popular due to some famous investors using them to great success: Peter Lynch, Warren Buffet, Benjamin Graham to name a few. The approaches vary but are all common with one fundamental starting point: company financials. The underlying "assumption" is that a company has a true, intrinsic value. This value can be derived from how the company is performing, or how much money the company generates from its operations. I say “assumption” as this isn’t so much an assumption as it is common sense- every company has a value, and this value is based on its performance.

Valuation methods can take on a variety of forms, using different aspects of company financials to derive a true value. This is where Discounted Cash Flow (DCF) models come in. A DCF model is one valuation method that relies on finding the cash flows a company generates and argues that this cash flow is the ultimate value proposition to the investor.

At DCF Tool, we have taken an introductory approach into the DCF modeling field- attempting to make the valuation approach more palatable and accessible to a beginner. We want to be the ultimate beginner source for investors just starting out. DCF Tool is a fully automatic DCF calculator that makes predictions based on the historical performances of each company listed on the major American stock markets. DCF models can become quite complex, with entire academic books and research on best practices. You can use DCF Tool as a launching pad into discovering the full depth of the field, if you choose.

Circling back to the original questions posed at the beginning, DCF models can provide the framework for answering them. How do you find new companies? DCF Tool has a leaderboard that automatically filters and finds investment ideas using the DCF model principles. How do you evaluate? DCF models are one approach in the valuation field. How do you have confidence? Valuation methods provide an explicit true value result. On top of that, they also have inherent adjustments you can make to find what safety factor, or confidence level, you can assume for a particular investment.

DCF Tool is the premiere site for beginning this journey into value investing. Use our calculator to see how different companies perform, and how changing different parameters can have significant impacts on the end results. Through this discovery, many amazing investment opportunities can be found, with comfortable safety margins to justify confidence in your position.