# Philosophy Money left as cash loses value over time, because of inflation. Over the last decade inflation was 3.4% a year. The first step in protecting your wealth from inflation is putting it somewhere that grows at least as fast. Standard candidates include the historically safe US bond, which pays a guaranteed return if you hold it for ten years, and an index fund, which usually grows over the long run (if you can stomach the ups and downs). Warren Buffett told the trustees of his own estate to put 90% of it in an S&P 500 index fund, and Morgan Housel describes this as his family’s financial strategy in The Psychology of Money. If you do buy individual companies, many investors who have beaten the S&P 500 over many years recommend buying a few good businesses at reasonable prices and holding them for years. Knowing what a reasonable price is before you buy is not as easy as it seems: it’s not about the raw number (stocks have wildly different prices), but how much future profit growth the current number implies. This is where Hopeboard comes in. ## A share price alone can’t tell you about the growth it assumes A share price on its own doesn’t tell you whether the company you’re buying is valued cheaply or expensively by the market. For that you would need to know how many real dollars of profit stand behind each share. Most finance apps & sites present a price and a chart for a ticker & statistics about recent price changes. This is not particularly helpful for the longer-term investing that experts recommend for most people. ## Where a stock’s return comes from Over a longer investment period, what you make from a stock comes from three factors: - how much the company’s profit grows - how many years of future profit people are willing to pay for the stock when you sell (compared with when you bought it) - the dividends the stock pays along the way That second part can matter as much as the business’s growth. For example, over the last decade Walmart’s profit grew 4% a year, yet its stock returned 20% a year. Nearly all of the rise in the stock price came from buyers being willing to pay more for the same profit: 42 years of it today, compared with 15 years in 2016. A counter-example: over the same decade Meta’s profit grew 35% a year, but new buyers of the stock now pay just 26 years of its current profit, versus 61 years back in 2016. Meta’s stock has ended up returning 19% a year, less than its profit grew. What changed in both examples was how much investors were willing to pay for a share of each company’s future profit. ## Investing in individual stocks is relative to the safer options The safe US bond pays a guaranteed return if you hold it for ten years. This gives us a benchmark to compare investments against: putting money into anything more risky should come with a greater return to compensate you for the uncertainty you’re opting into. The S&P 500 is the other yardstick: owning every big US company at once, which has returned 10% a year since 1928. Hopeboard measures every price against both. ## Teasing out what a given stock price is assuming in terms of future growth A company priced at 30 years of profit costs 30 times what it earned last year, per share. That’s the same number finance sites call the P/E. On Hopeboard, every company is measured the same way: how many years of its current profit you pay for when you buy its stock. This lets you compare companies across industries. Some stock prices assume more future growth than the business has ever shown. Others assume less than it has delivered in recent years. Hopeboard shows these growth assumptions built into each company’s stock price. Whether the business is actually strong enough to meet (or beat) these implicit growth assumptions is the part that a potential investor needs to decide for themselves. ## An investment case study: Apple In 2016 Warren Buffett was looking to invest in a big US company priced at no more than 15 years of next year’s profit (years of profit is the key measure Hopeboard shows for each company listed). His other criteria were that his managers were 90% sure the company would increase profit over the next five years, and at least 50% sure the profit growth would be 7%/year or greater. This search identified Apple as a candidate. Apple’s price at the time assumed 5% a year profit growth (what we classify as a bargain). Over the next ten years its profit grew 14% a year. Of course, no one knows whether the company’s profit will actually grow by the amount today’s price assumes, or more. But at least having this number extracted can set expectations. Working out whether a company is likely to meet or beat the assumption is the hard part of investing: Buffett typically resolves the question by drilling down into the details of the business. While examining Apple, he found out that about 95% of iPhone owners end up buying another iPhone, and that his wealthy friends would rather give up their private jets than their iPhones. ## Story-infused valuations Some share prices are wildly divergent from what the company earns currently, inflated by stories about future profits. Tesla, for example, is priced at 328 years of its current profit, on the idea that one day its robotaxi and robotics businesses will earn far more than its car sales. If a story fades, the company is likely to return to being priced on its actual profit, factoring in the growth its real business can reasonably support. In each company’s Risk or Cushion line, you can see the risk an investor is exposed to if the story backing a pricey valuation should end. ## Hopeboard shows you which companies are expensive and cheap Hopeboard does not give investment advice but can support you in coming to your own decision by calculating how much future profit growth is embedded into a stock’s price. It makes no predictions: it’s up to an investor to decide, once cognisant of the growth implied by a price, whether investing in this stock for the long term makes sense.