A student once asked Warren Buffett how best to prepare for an investing career. Buffett thought for a few seconds and then reached for the stack of papers he had brought with him.

“Read 500 pages like this every day,” said Buffett. “That’s how knowledge works. It builds up, like compound interest. All of you can do it, but I guarantee not many of you will do it.”

So here are some of my picks from my reading over the last couple of weeks for you to browse this weekend and make up some of your daily 500 pages.

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How accurate are DCF models?

The Discounted Cash Flow model is one of the most useful and commonly used valuation methods for businesses. It gives the investor a Net Present Value (NPV) of all future free cash flows expected into a company.

But just how accurate is it? It models earnings growth as stable but in reality it is usually very volatile. I decided to test how volatile earnings can affect the values given by DCF models and whether crude estimates investors usually use to account for this are sufficient.

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