Dear Reader,
Before grappling with specific topics, we must align on one major point: valuation and pricing are different things. The price is what you pay, while the value is what you receive. If I buy a $1 bill for 50c it is self-evident that although the price is only 50c the value is $1.
But, people don’t usually go around selling cash for less than the printed value, so we need a way of figuring out what other assets are intrinsically worth. That is to say, how much cash will this asset produce for me in the future and, based on how certain I am to receive it and what other options I have, what is that future-cash worth today. The less likely and further into the future that cash is to be received, and the better my other options, the less it is worth right now.
We must estimate:
How much cash will this asset pay me and when?
How much will these cash-flows grow?
How risky and uncertain are these payments compared to others?
It is with these primordial questions that we can estimate wh…