There are a lot of different approaches to fundamental analysis and value investing in stocks. Some people favor deep asset value plays. Some feel confident appraising small companies, big companies and even seemingly fairly valued companies.

A lot of analysts and investors use free cash flow models. I think that's great especially since they aren't using just revenues like many did in the late 90s and 00 before the tech bubble collapsed. That's what happens when you only use revenues. Things collapse.

I was thinking about using discounted cash flow models and it reminded me of how they can be almost arbitrary at times and I will actually never get dependent upon them. I remember this quote by Mohnish Pabrai that I really like and am probably paraphrasing,

If I have to break out the discounted cash flow it probably isn't cheap enough.

more Pabrai

In other words he waits for really, really obvious fat pitches the market throws at him where his intuition is essentially telling him that this stock is screaming buy me. You will know when there is a margin of safety without crunching a lot of numbers.

Some would say there is a problem with fundamental analysis in general. We are using the past and estimates and the unkown future to decide that the market is wrong at any one given time or simply to predict future business. Also, they would argue that we cannot accurately discount future events like externalities that will deem prior analysis worthless. Unexpected events can even damage companies with supposed large moats. Take RJ Reynolds or Altria (Phillip Morris) and government regulation for example. Take former "large moat" newspapers like The Washington Post, Tribune or Chicago Sun-Times and their competition with free content on the internet. Take the big moat Microsoft had ten years ago and see what Google has and is doing to their moat in tech.

Another big dilemma of fundamental analysis is generally an investor will hold a stock for many months and years. Business is in constant motion. The economy can swing big time quarter to quarter let alone year to year. How can we trust projected gross margins, earnings and cash flow in such a dynamic environment? I'd say we can't but rather we are only using the best information at hand to make a reasonable estimate. I bring this up not to say fundamentals are worthless, rather they are not perfect and possibly even inappropriate in some instances. Maybe this commentary will help re-affirm your conceptions of fundamental analysis or atleast allow you to think about it and maybe even strengthen it.