A big but brilliant topic Gromit, worthy of a thesis but I will make just a few brief points:
· Intrinsic Value (IV) is the present value of all future cashflows of a company. Sadly these are unknown so the IV is only as good as your assumptions - so never forget that an IV calculation is NEVER accurate… but it is invaluable in forming an opinion on value.
· The other valuation methods you mention (book value, ratios, etc) are pricing methods not valuation methods. Watch videos by Aswath Damodaran (https://www.youtube.com/watch?v=Z5chrxMuBoo) and read articles in his blog (http://aswathdamodaran.blogspot.com/) to learn more.
· The most important information someone includes when they post a valuation on Strawman is the assumptions they made to get to the value. Unless you agree with them all then you don’t agree with the valuation. The assumptions also provide addition information relevant to forming your own valuation.
· IV via DCF is probably best used to understand the assumptions that go into the current share price. A way of reverse engineering the current price to see if you agree with it. If you don’t then you may find undervalued opportunities.
· Margin of safety come from the assumptions you build into your IV. You may have a bull and bear case to help understand the impact of them and if the price is at or below your bear case then you have a margin of safety.
· Valuation DCF can be done different ways, but the terminal value assumptions are probably the most important part because it forms most of the value. Hence your future view of the company at 5, 10 20 years (or when every you see growth stabilising – terminal point) is most important and as a long-term investor should be your focus. You get your edge on the market by having a better insight to the value of a company by looking a long way out into the future.
· High growth (often unprofitable) companies are hardest to value but provide the greatest opportunity to find undervaluation. They are volatile because value is so hard to assess, but if you look through the NOISE of the market and hype and have a well-formed view on the long term prospects of the company then you will find many hidden gems.
I am using Strawman to publish my valuations in detail and improve my valuation approach. It forces me to put the extra work in on a valuation because it is published rather than cut corners and ignore gaps in my logic or methodology. I hope you will do the same and we can learn from you.
Regarding discount rates you asked about (bond yield issue) – I use 9-11% based on risk as a general rule. Aswath Damodaran has a blog on it and calculates current market risk premium of around 5% to add to 2% for 10 year bond yield, so current general market discount rates are about 7%. However, I look to a market average discount rate which is closer to 10% as a long-term average – a personal preference like most things in IV’s. Each to their own.