<What about change in net assets which may include excess revenues not
spent on the purchase of capital equipment, etc. Does that count at
all in future stock value? >
Yes
<Now, now, I thought "earnings" were not a valid assessment of a
company's stock value>
Refer to my post to Gerry, regarding accounting earnings vs, economic earnings.
< Future earnings seem even less viable than present and historical. >
This is probably the second most prominent flaw made by amatuer investors (taking bad advice is the most prominent :-|). You can not spend money that is already gone. All financial asset valuation takes for granted the ongoing viability of the asset in question, even if for just a finite period (bonds), or an infinite period (equities). Historical earnings have absolutely no bearing on the measurement of a stock's price. It is used to extrapolate, but that exptrapolation is subject to wide and speculatice interpretation. That is the way the game is played. That is also how good investors take the money away from bad investors. If one were to project cash flows, (even incaccurately), one will statictically come closer to actual market valuation at the end of xyz horizon, than one who "capitalized backwards": Put another way, if you were to buy a used car called NSCP, would you care how much mileage it gave the guy who had it before you, or are you more concerned with the amount of it would give you in the future.
<1929 was a good year for "exuberance" about the future
earnings of what was then the "hot stocks" of their day. What did
they do wrong that today's investor won't?>
That was before the science of cash flow volatility was viable, they did not have spreadsheets to do monte carlo analysis and 10,000 iterations per second. hence it was much more difficult to judge risk. The catch is that most of today's investors who rely on accounting earnings make the same mistake by ignoring the capitalized risk and the impreciseness of the accrual accounting methods they are assuming when making an investment.
For educational information on the topic, reference
rcmfinancial.com , and leave a couple of dollars at the door on your way out. |
