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Warren Buffett's Dividend Discount Model

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A wise man once said: Risk comes from not knowing what you 're doing (Warren Buffett). When said about Warren Buffett, no one denied his capabilities and influences in investment sector. Great quantities of interest and effort in business and investment showed by him since young age. Undeniably, Warren Buffett always been role model of mine for future career. From the 80/20 Rule, in the financial management, 20% of the people use their assets to do investment for increment of their net worth, while 80% of the people didn’t utilize their assets, they saved it in bank, buy new houses, cars or other material needs instead which indirectly increasing their debt. No crisis consciousness is the biggest life crisis for everyone. This explained why …show more content…

Stock valuation is the process of determining the current worth of an asset or a company. There are two types of valuation, which include fundamental analysis (FA) and technical analysis (TA). The example of the first one is top-down approach and bottom-up approach for the second. FA is the more enhance than TA as it involve the financial and economic analysis to visualize the movement of stock prices, while TA is more on forecasting future prices based on the inspection of past price movements while avoiding losses. Dividend Discount Model (DDM) is one of the example among TA. DDM is the most commonly widely used fundamental stock valuation model in practice. Although this method is a bit old-style, in fact, there are also specified companies remain DDM model as a useful tool for estimating value of the …show more content…

I have explained from the very basic. In this study, I will demonstrate the application of DDM and EMA in one question for reader to understand easily. Moreover, DDM have three stages which explained from the first stage, DDM is designed to value stock in a stable growth firm, the second is applied for firm which has unstable growth rate and a subsequent steady state and is expected to remain so for long term, while the third stage, when an initial period of high growth, a transitional period where growth declines and a final stable growth

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Warren Buffett is also an active politician and he worked as the economic advisor of the 44th President of the United States Barack Obama. Buffett supported Obama’s presidential campaign in 2008 and helped him since he got over the maximum power of the country. Warren admitted that he grew up in a ‘republican family’ and that he became democrat thanks to his wife Susan. Buffett admitted that as time passed he disagreed many times with the President’s proposals such as the health care program and that he had to work on it so it wouldn’t fail. In 2011, one of the most arguable economic problems the country had to face was the implementation of a new tax plan named the ‘Buffett Rule’.

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The DCF method has a lot of advantages over the Multiples approach, one would be that the DCF method considers the future of a company and values the future cash flows for every debt or equity holder. So, this method forces us to explicitly explore and analyze the fundamental factors that drive business value creation. Another advantage is the discount factor which shows us if a given company will be able to generate cash flows equivalent to its riskiness. A disadvantage of the DCF method is its complexity. The Multiples approach is usually only used to get a rough estimate how much a company could be worth.

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Just like how buffet strongly believed in value-investing in an environment where everyone else is chasing after high-yield stocks, one should be high disciplined in adhering to his or her investing strategy. A good strategy may not work well in all environments, but should deliver exceptional returns over the long-term. Investing in today’s markets – plenty of choices to choose

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