If we strip down to the bare basics of investing, it is swapping today's money for tomorrow's cashflows (or future cashflows). So, you buy a stock at $100 today. What you actually want is that the stock can generate more than $100 in terms of future cashflows into perpetuity. The goal of value investing is then to determine how much all these future cashflows is worth today, and pay a lower price (at least 30% lower). So in theory, if you can accurately calculate that the value of all the future cashflows is worth $200 today and you buy the stock for $100. Then you have made a lot of money. Of course that's the hardest part - estimating all the future cashflows.

So, how do we calculate all the future cashflow? The simplest methodology is to apply a multiple. If the co. earns $10 today, give it a reasonable (Read more...)