Dorsey: Discounted Cash Flow Models Undervalue Moat Businesses by Assuming Fading Returns
Pat Dorsey · Moat Investing Nuances – Pat Dorsey (EP.509) · Jul 6, 2026 · at 49:54
Pat Dorsey, founder of Dorsey Asset Management, critiques the limits of discounted cash flow models when evaluating high-quality moat businesses.
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“The thing that a DCF is quite poor at, even though people think it's long-term oriented, is that mathematically a DCF assumes that the multiple fades. It assumes that returns on capital fade to cost capital. But if we're looking for Modi businesses and we're trying to only own businesses that are Likely to, quote unquote, beat the fade, and sustainably have high returns on capital, the DCF may not be the best tool, because it might undervalue the business, and so you wind up suffering an opportunity cost, because you don't invest in things you should have.”
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