estimating future cash flows from an investment and determining their value today based on a required rate of return (which compensates you for delay and uncertainty); the process of estimating what an asset is worth today based on the cash you expect the asset to distribute in the future
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investment
a reduction of wealth today with the expectation of receiving greater wealth in the future
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intrinsic value
what an investment is worth based on the cash it can produce in the future
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market price
what an investor is willing to pay for an investment (driven by supply and demand)
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valuation formula
the present value of the cash flows an investment is expected to produced discounted at a rate of return that reflects (1) the postponement of using the cash today (delay) and (2) the risk of realizing those cash flows (uncertainty)
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investing
purchasing an asset with the view that the asset itself will pay more cash in the future than what you bought it for
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speculating
purchasing an asset with the view that you can sell the asset for a higher price to another investor in the future
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bias
a tendency or inclination that affects judgment and decision-making; all valuation and investing decisions have some degree of bias
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uncertainty
a situation where the outcomes or future events are unknown and cannot be predicted with complete confidence; no valuation or investing decision can be known with 100% certainty (this is why you are compensated with a rate of return)
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complexity
the state of having multiple interconnected parts or factors, making understanding or solving problems more difficult; more complex models do not imply a better valuation or investment decision
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