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The Key to Finding What Any Business Is Worth TodayBy
Wednesday, April 27, 2016
The first thing to consider when selling your house is, "How much will someone pay?"
That's what you need to ask before anything else because that's what the house is actually worth. It doesn't matter how much you bought it for 10 years ago. It doesn't matter how much the new owners will be able to sell it for 15 years from now.
It's only worth what someone will pay for it right now.
It's the same with every business in the world. It's the same with every stock, bond, and piece of real estate you'll ever own. It has been that way for hundreds of years. And it will be that way for hundreds more.
When investing your hard-earned money, it's important to remember this...
It's dangerous to pretend there's rationality where there isn't. As physicist Richard Feynman once said, "The first principle is that you must not fool yourself, and you are the easiest person to fool."
Don't fool yourself about the stock market. You're always betting the market will eventually get it right... and it frequently gets it wrong for longer than you can ever imagine.
Even the late Benjamin Graham – the ultimate value guru, the father of security analysis, and Warren Buffett's mentor – looked at the stock market as a manic-depressive person named Mr. Market. Graham said we should buy from Mr. Market when he's depressed and sell to him when he's manic. When you buy, you're speculating he won't commit suicide. When you sell, you're speculating it's only a matter of time before he's depressed again.
The only price you'll ever get for any publicly traded equity is the value other investors assign it on the day you sell. So you must have a thoughtful opinion on how they'll behave over the long term... and how you'll behave when they go crazy over the short term (which is usually longer than you want it to be).
It's a shortcoming of human nature that, once we see a particular set of numbers, we anchor on it, assigning it a higher probability of coming true than we should.
But always remember this when assessing a company's value...
Published financial information comes in two varieties: actual past results and projected future results. You can't invest in the past, and you can't know the future.
A business is worth the present value of all future excess cash flows... But as soon as you start trying to predict those flows, you're more likely to fool yourself than to paint an accurate picture of the future.
Like most things in investing, though, it'll have to do. It's all you get, so you'll need to use the numbers in front of you to decide whether you think the investment is worth it.
But just remember to ask yourself, "How much will someone pay?"
Good investing,
Dan Ferris
Further Reading:
"Whether it's burgers, bandages, or books, investors owe it to themselves to know about the company that sells the most," Dan writes. "There's no substitute for being No. 1." Learn more about what he calls the highest-quality stocks in the world here: Use This Simple Secret to Find the Best Stocks.
High-quality companies selling for bargain prices are market anomalies... and those deals don't last long. Mike Barrett explains how to get in before that correction right here: What I Learned From Our Most Successful Recommendation.
Market NotesTHINGS ARE GETTING 'LESS BAD' IN THE MINING SECTOR Things have gotten "less bad" in the mining sector... and it's boosting shares of one of the industry's top "picks and shovels" providers.
Regular DailyWealth readers are familiar with using "picks and shovels" to profit from sector and commodity booms (read our educational interview on the subject here). "Picks and shovels" providers don't bet the farm on one project... they sell vital goods and services to an industry.
One great example is Joy Global (JOY). With annual sales of around $4 billion, Joy is the world's leading manufacturer of underground mining equipment. As analyst Brian Weepie noted in a recent Growth Stock Wire essay, about 40% of the company's revenue comes from the mining sector. That makes its share price a good gauge of what's going on in the mining business.
As you can see in the two-year chart below, Joy's shares lost about 80% of their value during the brutal bear market in commodities. But since the start of this year, things have gone from "bad" to "less bad" in the mining business. Joy's stock has soared 130% since hitting a low in late January... carving out a new uptrend in the process. As Steve likes to say, things don't have to get "good" for stocks to soar... they just have to get "less bad."
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