The 3 stages
December 1st, 2020
1 minute read
1 minute read
We’re entering stage 3
Lag
Last time I wrote about the idea that stocks mostly lag rather than lead. To be clear, there are still multiples in valuations, but the idea is the multiples are based on performance in the past rather than the future. I showed the examples of Japan catching up with its flat GDP & Indonesia far behind its quadrupled GDP. The question is why do markets lag...
Stage 1, growth
In my opinion, there are 3 main stages. The first stage we can call the growth phase. This is where a new or established business raises money by listing on the stock market as it is growing fast. In stage one the stock price follows soles (the present) & the shares might achieve what are considered super high valuations, but later they turn out not to be...
Stage 2, decline
In Stage two, something goes wrong. It can be several things. The economy might slow down & sales growth disappears. Slowing sales reveals another issue. During stage one growth, debt increased because cashflow was negative from investments. The debt means higher interest. Suddenly reported profits disappear, share prices collapse & are now lagging )far).
Stage 3 cashflow
In stage three, the company slows down their investments & may close some parts or sell others, raising money. As the economy recovers & sales growth returns, with less investments, cashflow can now grow faster than sales. As cashflow pays debts & dividends, stage three is when share prices perform best & catch back up to the present.
Now
The JCI index is now entering stage three. In stage three there is cashflow & cashflow is much more valuable to investors than net profit, even if they don’t realize it. Stage three is therefore when valuations get much higher than anyone thinks possible. In stage one, investors think valuations are crazy, but they’re not. AMZN was less than USD100 at the 2000 peak, now it’s USD3,100!
Last time I wrote about the idea that stocks mostly lag rather than lead. To be clear, there are still multiples in valuations, but the idea is the multiples are based on performance in the past rather than the future. I showed the examples of Japan catching up with its flat GDP & Indonesia far behind its quadrupled GDP. The question is why do markets lag...
Stage 1, growth
In my opinion, there are 3 main stages. The first stage we can call the growth phase. This is where a new or established business raises money by listing on the stock market as it is growing fast. In stage one the stock price follows soles (the present) & the shares might achieve what are considered super high valuations, but later they turn out not to be...
Stage 2, decline
In Stage two, something goes wrong. It can be several things. The economy might slow down & sales growth disappears. Slowing sales reveals another issue. During stage one growth, debt increased because cashflow was negative from investments. The debt means higher interest. Suddenly reported profits disappear, share prices collapse & are now lagging )far).
Stage 3 cashflow
In stage three, the company slows down their investments & may close some parts or sell others, raising money. As the economy recovers & sales growth returns, with less investments, cashflow can now grow faster than sales. As cashflow pays debts & dividends, stage three is when share prices perform best & catch back up to the present.
Now
The JCI index is now entering stage three. In stage three there is cashflow & cashflow is much more valuable to investors than net profit, even if they don’t realize it. Stage three is therefore when valuations get much higher than anyone thinks possible. In stage one, investors think valuations are crazy, but they’re not. AMZN was less than USD100 at the 2000 peak, now it’s USD3,100!
