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Speaker 1: Welcome to Ask Fear and Greed, where we answer questions

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Speaker 1: about business, investing, economics, politics and more. I'm Michael Thompson

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Speaker 1: and hello, Sean ale Ma.

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Speaker 2: I'm Michael John.

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Speaker 1: A good one today, and it's one that you often

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Speaker 1: see kind of headlines about this kind of thing. Why

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Speaker 1: do some companies get valued at billions of dollars before

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Speaker 1: they even make a profit.

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Speaker 2: So, Michael, we've been doing this show for what five years? Yes,

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Speaker 2: surely you know the number one lesson of investing. You're

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Speaker 2: buying a stock based not on what it's done, but

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Speaker 2: what you think it's going to do. Yes, I do

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Speaker 2: know that. You do know that, and that's the short

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Speaker 2: answer to that. Now, when you buy a company or

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Speaker 2: you buy a stock, think of it as a small

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Speaker 2: business rather than like stocks had. What's something worth while?

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Speaker 2: You could take the business and sell all parts of it.

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Speaker 2: That's the value of it. That's one way of doing it.

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Speaker 2: You can do something what they call capitalized future earnings,

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Speaker 2: which is where we're coming into the question here. So

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Speaker 2: you're buying the assets and then the rights to future profits.

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Speaker 2: So people who are investing in a company that's losing money.

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Speaker 2: Now I'm going to get this wrong, but I think

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Speaker 2: at Lassian still loses money the big software group. What

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Speaker 2: you're doing is you have such faith in the products

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Speaker 2: that at Lassian makes, the software it makes, that at

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Speaker 2: some point in the future it is going to be

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Speaker 2: worth a bomb, and therefore I'm happy to buy shares

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Speaker 2: in a Lassian on the basis that in the future

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Speaker 2: it will be turning over lots of money. And that's

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Speaker 2: really why you spend money on the company that doesn't

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Speaker 2: have money or that doesn't make money. It's all about

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Speaker 2: future earnings in really tumultuous times like we have now

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Speaker 2: selling those sorts of stocks, but we're buying those stocks. Well,

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Speaker 2: you can always buy them, but actually selling them is

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Speaker 2: harder because people are worried about what's going to happen

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Speaker 2: in the future. So that's why we end up buying

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Speaker 2: into companies that haven't actually got earnings. There are other

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Speaker 2: ways you can value a company, so like the earnings multiple.

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Speaker 2: So sometimes you might say a bank is training at

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Speaker 2: fifteen times earnings, and what that is basically its share

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Speaker 2: price as a multiple of what it earns per share.

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Speaker 2: Really normal way. I mean, there's also the comparable way.

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Speaker 2: So if you're trying to sell something. You just see

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Speaker 2: a comparable business, what did that sell for? And you

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Speaker 2: compare that way? But really the number this question is

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Speaker 2: why do you buy something that hasn't got any earnings? Yep,

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Speaker 2: And it's all about you're looking at the return on

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Speaker 2: investment in the future where you think it's going, Yeah,

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Speaker 2: not about where it's at today.

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Speaker 1: That's really quite a simple answer, then, isn't it.

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Speaker 2: Yes, they called the future earnings are what they call capitalized.

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Speaker 2: I mean, you said it's a simple answer, So I'm

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Speaker 2: going to start complicating it.

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Speaker 1: Of course you will. You can't just You couldn't just

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Speaker 1: leave it there, could you.

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Speaker 2: So the giving future earnings an expected value, they capitalizing

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Speaker 2: those earnings even though there aren't any at the moment.

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Speaker 2: And once you do that, once you capitalize future earnings,

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Speaker 2: you can see what your return on investment is. So

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Speaker 2: if you're spending ten bucks, you're capitalizing future earnings at

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Speaker 2: one hundred bucks, your return on investment is ten times.

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Speaker 1: Okay, you really did complicate it there at the end.

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Speaker 1: I followed you, But I mean we really could have

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Speaker 1: probably just left it about a minute ago. No good answer,

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Speaker 1: comprehensive answer, comprehensive.

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Speaker 2: Good yeah, please all the.

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Speaker 1: Marks for comprehensiveness. That's right, Okay, thank you very much.

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Speaker 1: Sean well answered you very much.

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Speaker 2: Michael.

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Speaker 1: Remember, if you've got something that you'd like to know,

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Speaker 1: then please send me your question on LinkedIn, Instagram, Facebook,

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Speaker 1: or at Fear Anddgreed dot com dot au. I'm Michael

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Speaker 1: Thompson and this is asked Fear and Greed