Investing Is Easy
Investors,
This report is too long to read in its entirety in your email, so please access the full report by clicking on the title, “Investing is Easy”, within the body of the report, or by visiting the Cubic Analytics website.
Introduction:
Investing is easy when you actually focus on what matters.
At the end of the day, asset prices (regardless of whether we’re talking about equities, fixed income, real estate, etc.) are just a function of future cash flows and a discount rate. Some of you might be read this and feel like I just spoke a foreign language, but I promise you it isn’t that difficult.
Assets, typically, produce cash flows.
If you own a house, you have the ability to rent it and generate income.
So how much is that stream of income worth to you?
Well, it depends on what the interest rate is!
In fact, most of finance just depends on one simple formula to solve for net present value, discounting the future cash flows into the present to determine an asset’s price.
So what are the future cash flows for a stock?
It comes down to two things: earnings and dividends.
But given that many stocks don’t pay dividends, particularly the growth-oriented businesses, it’s appropriate to primarily focus on earnings as a primary driver for stock prices. This is why earnings season is such an important time of the quarter, because it provides a fundamental basis to estimate what an asset should be worth.
At the present moment, 95% of stocks within the S&P 500 (aka the 500 most important stocks in the entire world) have reported their latest quarterly results.
Thankfully, they’re doing well. Quite well…
In fact, forward 12-month earnings estimates are making new all-time highs!
Hmmm… what a coincidence…
Because the S&P 500 is also making all-time highs…
Wait a minute…
Maybe fundamentals do matter and fundamentals are both solid & improving.
You’ll also notice that the S&P 500 tends to peak/bottom before earnings, which is an important recognition to make because the market is a forward-looking pricing mechanism, discounting all known and unknown components via the voluntary exchange between buyers and sellers at an given point in time.
In other words, equilibrium (and the constant determination of equilibrium) is a crystal ball, in which price is the arbiter of truth and the only objective truth that matters.
Isn’t that beautiful?
I think so.
Everything starts and ends with price.
As investors, we seek to manufacture arbitrage by either:
Buying low and selling high
Buying high and selling higher
Fundamentally, there’s no other way to make money in the market.
And isn’t that why we’re all here? To make money? I sure am.
Investing is stressful.
It requires us to be risk-takers.
It involves us putting our hard-earned money into the abyss, with the intention of taking out more than we put in at some point in the future.
So shouldn’t we at least hope to be compensated for this stress and risk?
I’m assure you, I’m not putting in this effort & energy to take risks and lose.
This is why it’s so important to focus on what ACTUALLY matters, reduce noise, and focus on price action above all else to navigate an ever-changing market environment.
So long as we continue to do these things, week after week, I think we (premium members) will stay aligned with the market trend.
Let’s begin this new premium edition of Cubic Analytics: