The Simple Definition of Investing - What Does “Cheap” Mean?
Investing used to be about safety. Not anymore.
Investing revolves around cash flows, or in simpler terms, we can call them apples so it would easily pass the grandma test. Yesterday’s post focused precisely on this concept.
Today, our focus shifts to the second key aspect of investing: price. Let’s delve into a thought experiment to illustrate this idea. Consider the following parameters (we’ll overlook real-life complexities such as taxes and transaction costs):
You decide to buy a grafted seedling - an apple tree for the sake of simplicity - that will yield apples in one year’s time. (Growing an apple tree from seed could take anywhere from 7-10 years before the first fruit is harvested.)
This particular apple tree is special because it guarantees the production of 100 apples per year, but for a single year only. (Ordinarily, a healthy apple tree can bear fruit for up to 50 years).
You have the option to sell each apple for $1 at the local farmers market, and you are guaranteed to sell all of the apples.
The Interest rates on savings accounts stand at 10%, which is paid at the end of the year, coinciding with the apple tree’s growth.
Now, the question arises: How much would you be willing to pay for the apple tree? What price is cheap enough?