Uncommon Sense by Michael Kemp

Author:Michael Kemp [Kemp, Michael]
Language: eng
Format: epub
ISBN: 9780730324256
Publisher: Wiley
Published: 2015-08-24T00:00:00+00:00

JEAN TRENCHANT

Three and a half centuries after Pisano, French mathematician Jean Trenchant further advanced the mathematics of discounting. His 1558 book L'Arithmétique contained a practical table to facilitate the number crunching. His book also described perpetuities — the mathematics of infinite series. This was another valuation tool to be picked up by future stock analysts, as, for the purpose of valuation, companies are commonly considered to have an infinite life.

I've no doubt Pisano and Trenchant were justly proud of their achievements, but there is a very large elephant in the room when you start using these tools to value stocks. The formulae are mathematically sound, but formulae require accurate inputs in order to provide accurate outputs. Future cash flows can be defined for bonds and annuities, and both are financial instruments to which Pisano's and Trenchant's formulae can be usefully applied. But the accuracy is lost when calculating stock values. Stock analysts are left to plug in guesses (sorry, ‘estimates'!) of what the future cash flows might be.

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