In this video clip from "What in the World" on Motley Fool Live, recorded on Feb. 4, Fool Australia's chief investment officer Scott Phillips gives some good advice to investors about how to handle market volatility and valuing a stock.
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Scott Phillips: But think about what that price movement in a single day says. If the value of a company is the value of all of its future cash flows. Again, even if you are not a value investor, the simple reality is eventually over time, they're going to be worth what the investor is going to get back from earning cash flows. That makes perfect sense.
If that's true, and Shopify (SHOP -1.81%) is down 10%, the market is saying to you, the value of cash profit from here to eternity, whenever it starts in whatever size and wherever it rolls out from there. The entire future cash flow from here to eternity for Shopify is worth 10% less than it was not last year, not 10 years ago, not five years ago, yesterday.
I hope you understand the theory behind that math because it's important. I hope they had told you the absurdity of the volatility. If you're someone who looks at the markets, says, oh my God, I feel poor because my shares are down 10%. Then yes, there were 10% less, that's objectively true. But if you cash out your portfolio now, you get 10% less for your Shopify shares.
On the flip side, do you really think the market was right yesterday and right today, it was at 10% difference in six-and-a-half trading hours in one company versus full profitability from now till eternity? I guess really unlikely, and I hope the absurdity of it is clear to you as well. Because once it's really clear, I hope what you get from that is, why would I bother letting the market tell me what my shares are worth? Why would I bother day in, day out saying, I'm richer, I'm poorer?
It is literally one of the craziest things that humans do. Now, it's not your fault, it's not my fault. Our evolution teaches us that and I get that's what happens. Just remember that when those things happen, it shouldn't be telling you, you're richer, you're poorer, it should be telling you the market is still nuts. Speculators, traders, guessers, are still doing their job.
None of that should be relevant to you and shouldn't be relevant to me. Doesn't mean it's not hard to get rid of. It still hurts, I get it. But keep that absurdity in mind because if we feel poorer, you feel where you are at the share price you go. But those people are telling me what my shares are worth, really? Am I going to really take that to heart? I hope you won't.