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ATC (Absolute Total Compound)'s avatar

Gordon Growth Model is for infinity time period.

It is impractical to be applied in stock investment.

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ATC (Absolute Total Compound)'s avatar

The Buffett-Munger Profitability Investing Truism Dharma 150:

Justified Discounted Growth Formula for n-year

The Gordon Growth Formula is valid with 2 prerequisite conditions:

i.

The time frame is ∞ years.

ii.

The g (growth) is less than r (discount).

iii.

That means, for a stock with g > r, or with a finite N year, Gordon Growth Formula will be rendered invalid.

iv.

Investment for an infinite number of years is logically ill, not realistic.

v.

Correction:

Justified Discounted Growth Formula for n-year

= D₀ × F × ( 1 - Fⁿ) / (1 - F)

where

D₀

= Dividend TTM

D₁

= The First Discounted Dividend of forward 12 months

= D₀ × F

F

= (1+g) / (1+r)

g

= dividend growth ratio

r

= discount ratio

n

= number of years

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Greg ┃The Elevator Pitch's avatar

Super interesting frameworks, well explained. I have one company with ROIC above 70% and justifying the valuation is always a challenge. Definitely will try those approaches.

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Incremental Returns's avatar

Thank you. Yeah, they’re just another tool in the valuation/pricing tool box.

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Mar 8
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Incremental Returns's avatar

True. I found it’s a decent exercise for mature, stable capital structure, companies expected to grow earnings sub 10%.

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