Here I think you're mistaking my valuation for target pricing. Belief about a company's prospects isn't what I bank on. What I bank on is when a company is currently underpriced relative to its net current assets and a very, very conservative discounted cash flow projection tending toward terminal growth. I don't care one whit about some chatter about some hypothetical product they might release in two years time that will be the "killer app" or "killer widget" if you will. The only time cash flow projections are complicated is in highly seasonal businesses or unpredictable businesses that change very rapidly (I.T. for example), or where there are large fluctuations in raw materials costs. Otherwise, companies like my own employer set targets in their plan and forecast and then sales VP's, directors and managers manage the resources strategically to go after those numbers. If those targets seem ludicrous and unattainable, then even the company's past operating history will show some holes. But this is also why I like businesses that have high retention/renewal rates.
But let me simplify the question for you in two ways:
1. Why would it ever be sensible for me to err on the side of speculative valuation rather than conservative, M&A-based valuation, in determining my preferred acquisition price? (which is more likely to be overinflated?)
2. If you know of a better way to reach a conservative valuation than strong operating performance, wide competitive moat, sound management, fair liquidity (quick ratio > 1), evidence of predictable movement of working capital through the sales cycle (to suggest steady, not erratic cyclicality), then I'd love to hear it.
-OR-
If what you're suggesting is that even a solid valuation methodology (one that is in practice with M&A consultants/analysts, private equity firms, etc.) can't produce consistently adequate returns and safety of principal, then what methodology can you demonstrate has for four decades performed better than the combined performance of Sequoia Fund, Berkshire Hathaway, Peregrine, Perlmeter, SocGen/First Eagle? (all of these have 30-40 year average annual compounded returns better than the S&P, and they're all run by value investors)*
* The last of these, First Eagle's Global Fund, lost money only two times during Jean Marie Eviellard's three decades at the helm: 1.3% in 1990 and 0.26% in 1998; otherwise their 30-year annual average compounded return was 15.8%. Eviellard's successor, Charles de Vaulx kept Global hitting home runs between 14.9% and 20% from 2005-2007 before his departure and Eviellard's return to protect funds that he oversaw for decades.
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