“The driver of a stock’s value is the sum of its future cash flows discount-ed back to today.”*

What a mouthful.  But it is true.  What in the world does it mean?  

For an investor planning to buy and sell stock, understanding that statement’s meaning and using that knowledge is crucial when considering making a trade.

How Do I Make the Greatest Profit?

The purpose of investing, of course, is to make a profit – that is, to end up with more money than that with which you began. As noted in September’s “Finance” column, making a profit is of life-or-death importance.

The greater your profit, the more money you will have to spend on the things in your life worth paying for.  

So what is the best way to make a profit?  

You could put your money into a savings account or buy a savings bond.  A small profit is guaranteed – but with the inflation rate being so high (thanks to Biden and the 2021-22 Democrat-controlled Congress), prices can easily grow as quickly as the interest you will earn on a savings account or bond.  You have more money, but it will buy no more than it did when you placed it in savings.

If you just keep your money in your pocket, with inflation its value actually decreases.

Investing in stocks is a great opportunity for actually increasing the value of your money.

When looking at stocks you are considering for purchase, one factor to learn is the projected cash flow over the coming years.

If a company projects that it will make $1,000,000,000 in sales per year, while another company projects it will make only $1,000 per year in sales, obviously the first will have a higher cash flow.  That greater amount of money can be used to increase pro-duction, to innovate, to advertise, etc.  

All things being equal (i.e., both companies have good management that will make the most of what they have), that bigger cash flow will result in greater profits – and not surprisingly, a higher price for shares of their stock.

But that quote also said, “discounted back to today.”  What does that mean?

“Discounted back to today” implies asking the question, if that company’s investors could have invested instead in some other company, or even put their money into a savings account, would that have been a better choice?

If a company is actually losing money – a negative cash flow – then the price of their stock will be going down, as has happened at Boeing lately.  A savings account would actually have been a better choice.

A company does not have to have a negative cash flow.  If their cash flow is positive but too low, the change in their stock price will be not so great – in other words, this will be a stock to be avoided.

In real life, of course, each stock’s price fluctuates due not only to the company’s successes and failures, but also due to the demand for the products they sell, the general condition of the over-all economy, and the impact of gov-ernments’ actions.  

The graph shows the price of Adobe’s stock over the past six months.  The stock went from $480 to $520, for a gain of just over 8%.  That is better than a savings account, but not by so much as to be worth the tension and stress endured over the course of those six months.  

The initial dip to $440 would lead you to question whether to sell the stock and look for a stock likely to have a better future.  Similarly, when the stock returns to the purchase price in the 5th month does not suggest a brighter future ahead.

Fluctuations in stock prices are a fact of life.  Watching a stock change In price for a few minutes or even a whole day makes it clear that what has happened in the past is no indicator of what will happen even sixty seconds into the future.  There are too many buyers and sellers of stock all making personal choices to buy or sell at specific prices for the price to stay static.  

Investing in stocks implies the intention to hold that stock for a long duration.  To make that choice knowledgeably implies educating yourself about a company’s condition in every way possible.  

Investing implies having an understanding of what drives a stock’s value.

* From the arti-cle “Why Adobe (ADBE) Shares Are Getting Obliterated Today”, at https://finance.yahoo.com/news/why-adobe-adbe-shares-get-ting-165815670. html.