GCM believes a potential investment can only be evaluated correctly by using original, primary data. To start our analysis, we manually rebuild a company’s balance sheet and income statement with data from the past five years. We use the Sustainable Free Cash Flow Model (SFCF) to develop a discounted cash flow model of the company under consideration.
A company’s fair market value is determined by its free cash flow. A successful investor must have an understanding of the prospective distribution of free cash flows per share (fair values). Armed with this information, GCM can determine where the current share price (the objective measure of value) is located on the distribution of free cash flow per share. This enables us to calculate the probabilities for gains and losses.
“Look for more value in terms of discounted future cash-flow than you are paying for. Move only when you have an advantage. … You have to understand the odds and have the discipline to bet only when the odds are in your favor.”
– Charlie Munger (1924 – )