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Chapter 15. Ten Lessons for Investors > Lesson 4: Remember the fundamentals

Lesson 4: Remember the fundamentals

The value of a business has always been a function of its capacity to generate cash flows from its assets, to grow these cash flows over time and the uncertainty associated with these cash flows. In every bull market, investors forget the fundamentals that determine value—cash flows, expected growth and risk—and look for new paradigms to explain why stocks are priced they way they are. This was the case in the technology boom of the late 1990s. Faced with stratospheric prices for new economy companies that could not be explained by conventional approaches, investors turned to dubious models, in which growth in revenues substituted for earnings and cash flows did not matter. In the aftermath of every bull market, investors discover the truth that the fundamentals do matter and that companies have to earn money and grow these earnings to be valuable.

Proposition 4: Ignore fundamentals at your peril.


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