Range of Fair Value
Replace false precision with valuation boundaries that trigger disciplined action
- Difficulty
- Moderate
- Time to result
- ~weeks to results
- Steps
- 6
- Confidence
- 99%
The Range of Fair Value framework recognizes that a company's future cash flows cannot support a single perfectly precise valuation. The analyst develops defensible lower and upper boundaries using different but plausible assumptions. The range may be wide and still useful: a price below the lower boundary signals a potential purchase, while a price above the upper boundary provides a reason to sell or trim. Inside the range, the default is restraint because turnover has a known cost and only an uncertain benefit. The range must change when material evidence changes expected cash flows. A falling stock can therefore become a sale if deteriorating fundamentals push the revised fair-value range down even faster. Position decisions also account for more attractive alternatives across the portfolio.
Origin
Chris Davis attributes the idea to a Ben Graham classroom exercise in which Graham valued a company between twenty and one hundred twenty dollars, arguing that the wide range remained highly useful outside its boundaries.
Core principles
- 01Value is a range, not an exact point
- 02Price uncertainty explicitly
- 03Act decisively outside the range
- 04Limit trading inside the range
- 05Update the range when cash-flow evidence changes
How to run it
- 1
Model plausible outcomes
Estimate future cash flows under conservative, central, and optimistic assumptions rather than relying on one forecast.
Pro tip Concentrate on variables that materially affect owner cash.
Watch out Do not disguise uncertainty with extra decimal places.
- 2
Set valuation boundaries
Convert the plausible outcomes into a lower and upper fair-value boundary.
Pro tip Make the assumptions behind both boundaries explicit.
Watch out A narrow range may imply unjustified confidence.
- 3
Act below the range
When price falls below the lower boundary, investigate whether the gap provides an adequate margin of safety and compare it with alternatives.
Pro tip Confirm that price, rather than impaired fundamentals, caused the gap.
Watch out Cheapness alone does not make a broken thesis attractive.
- 4
Stay restrained inside the range
Avoid frequent fine-tuning when price lies within the defensible valuation interval.
Pro tip Let tax, transaction, and attention costs reinforce patience.
Watch out Activity inside the range often has certain costs and uncertain benefits.
- 5
Trim or sell above the range
Use positions near or beyond the upper boundary as sources of cash, usually reducing them gradually.
Pro tip Reserve immediate full sales for extreme prices or material thesis changes.
Watch out Do not retain an overvalued position merely because it is a good company.
- 6
Revise with new evidence
Update cash-flow assumptions and boundaries when company results or other material facts change.
Pro tip Recalculate before reacting to the accompanying price move.
Watch out A lower price can still be expensive relative to a newly impaired outlook.
In the wild
A company's shares decline after new information reveals permanently weaker margins. The analyst reduces projected cash flows and recalculates the range. Although the market price is lower, it now sits above the new upper boundary, so the portfolio sells rather than automatically buying the dip.
→ The decision responds to revised business value instead of price direction alone.
Common mistakes
Publishing a point target
A single target implies a degree of certainty that long-term business forecasts cannot support.
Trading within the twilight zone
Constant adjustments inside the fair-value range impose costs without a reliably measurable benefit.
Keeping the range static
New evidence can change intrinsic value even when the quoted price barely moves.
Is it for you?
Best for
It is best for fundamental investors valuing uncertain long-duration cash flows.
Not ideal for
It is not ideal for mechanical strategies that require a single exact price target.
From the transcript
“what we tend to come up with are what we call ranges of fair value.”
“All of our portfolio activity happens when companies are below that range or above that range.”
“Within that range, we try not to do so much because turnover has a certain cost and an uncertain benefit”
From the episode
Christopher Davis Discusses Smart Value Investing