In this segment of “The Morning Show” on Motley Fool Live, recorded on December 13, Fool, Bill Mann, Director of Small Cap Research, and Jim Gillies, Senior Analyst, discuss one of the top reasons people invest.
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Bill Mann: Do Motley Fool’s methods of investing work in a rising rate environment, as you invest based on future cash flows versus current cash flows?
I’m going to say something that’s probably pretty extreme, but directionally correct. Everyone invests in future cash flow whether you know it or not. Even asset-based investors. The investment concerns the future profits of the company discounted to today.
Now the discounted part until today is important because the higher the interest rates, the higher the discount. Because in a zero interest rate environment, if I lend Jim Mueller a perfectly good credit risk, $ 100, I’m going to ask for $ 101 next year.
But in an environment of high interest rates, an environment of high inflation. I’m basically costing myself money, so it would be next year that I would ask him $ 106 back. It has nothing to do with Jim, Jim has the exact same credit risk, but this is the environment we are in.
Future cash flows are less valued today in a higher interest rate environment. Is this hurting growth stocks? Stocks. Without a doubt, yes. Our methods, which Jim just showed you, work because they don’t work all the time.
Jim Gillies: Accept. Joel Greenblatt’s explanation for The Little Book That Beats the Market. It beats the market because it doesn’t always beat the market.
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