The trouble with forecasting markets is that there are so many variables, often moving in opposing directions. How do we know how much weight to put on each one?
There is no correct answer to that question, except of course in hindsight. But unfortunately hindsight doesn't provide us a viable way of investing.
At a fundamental level, when we buy shares of a company or a group of companies, our ownership interest represents a share of future profits. The higher those future profits are, the more we should be willing to pay for a share of those profits.
Common valuation methods use this exact concept. For example a discounted cash flow (DCF) model looks at projections of future profits to determine how much a company is worth today. A basic DCF analysis operates on the idea that a company's value is equivalent to the amount of cash it can make available to investors in ... Log in or subscribe to continue reading.