This should be intuitive if you think about a present value calculation — when you change the discount rate used on
a stream of future cash flows, the longer until a cash flow is received, the more its present value is affected.
Think of assets as
a stream of future cash flows.
The essential point, however, is that these elevated valuations don't change
the stream of future cash flows.
No - the true «wealth» is in
the stream of future cash flows and value - added production that generates those future cash flows.
But again, the true «wealth» represented by any security is in
the stream of future cash flows it delivers over time, and in the value - added production that generates those cash flows.
I've often called it the Iron Law of Valuation: the higher the price you pay today for a given
stream of future cash flows, the lower your rate of return over the life of the investment.
Short - term financial disappointments may contribute, but stocks are a claim on an infinite
stream of future cash flows.
The higher the price an investor pays for a given
stream of future cash flows, the lower the long - term return an investor can expect.
Over the years, I've emphasized what I call the Iron Law of Valuation: the every security is a claim on an expected
stream of future cash flows, and given that expected
stream of future cash flows, the current price of the security moves opposite to the expected future return on that security.
That imbalance of eagerness between buyers and sellers has clearly affected prices of risky assets, but it does not generate new cash flows - it simply raises the valuation that the market places on existing
streams of future cash flows, and thereby lowers the subsequent rate of return on holding those securities.
Not exact matches
Now there's no doubt that something has, indeed, gone badly wrong with capitalism in the recent economic cycle, but we hasten to add that stocks are not only a claim on one year or one cycle
of cash flows, but are claims on a
stream of future deliverable
cash flows with an effective duration
of about 50 years.
Clearly, the current valuation
of NFLX implies a
future cash flow stream that even the strongest
of business models would be challenged to achieve.
This follows from the Iron Law
of Valuation — the higher the price an investor pays for a given
stream of expected
future cash flows, the lower the long - term return one should expect.
Yes, if you have a
stream of future expected
cash flows and need to estimate a fair price, interest rates should inform your choice
of an appropriate discount rate.
The main points here are that QE has encouraged the dramatic overvaluation
of virtually every class
of investments; that these elevated valuations don't represent «wealth» (which is embodied in the
future stream of deliverable
cash flows, not in the current price); that extreme valuations promise dismal
future outcomes for investors over a 10 - 12 year horizon; and that until a clear improvement in market internals conveys a resumption
of speculative risk - seeking by investors, the current combination
of extreme valuations and increasing risk - aversion, coming off
of an extended top formation after persistent «overvalued, overbought, overbullish» extremes, represents the singularly most negative return / risk classification we identify.
Over the full cycle, the market recognizes reasonably - valued stocks that throw off a reliable
stream of cash to shareholders (especially those that exhibit enough investor sponsorship so that
future cash flows aren't called into question on the basis
of others» information).
Even if that multiple is based on historical ranges (medians or averages) or is comparable to industry peers or the market as a whole, investors fall short
of capturing the uniqueness
of a company's
future cash flow stream and balance sheet via a discounted
cash flow process, which considers all
of the qualitative factors
of a company — from a competitive assessment to the company's efficiency initiatives and beyond.
Furthermore, even if book sales were to decline, it is our belief that the discounted value
of the
future stream of cash flows that BKS could expect to generate, otherwise known as its intrinsic value, would far exceed the current enterprise value
of the Company.
What does matter is finding new products and processes that change the value
of the
future free
cash flow stream.
However, even though defined benefits are expressed as monthly income, they have a present value, which is simply the
stream of their expected
future cash flows expressed as a discounted lump sum.
One
of the key inputs to valuation is the risk adjusted cost
of capital applied in discounting the
future cash flow streams, whether it be applied to dividends or the company's free
cash flow.
The intrinsic value approach relies on estimating value based on a combination
of the net present value
of the
future cash flow stream of a business and any excess assets not used to generate those
cash flows.
I want to share with you a brief look back at the passed year focusing on my achievements in terms
of passive income and I will also make some projections regarding
future cash flow streams.
Pay off the debt and use the monthly
cash flow savings to build a
future stream of retirement income.
It can occur in assets when people and institutions become maniacal, and push the price
of an asset class well beyond where its
future stream of cash flow would warrant.
The goal is to find a reasonable price for a
future stream of cash flows and compare it to a risk - free rate
of return, usually US treasuries.
RCFP provides investors with an additional income
stream by way
of regular
cash flow to take care
of future projected needs.