As the most speculative bull market in a few years churns higher, I am reminded once again why these things overshoot and then blow up. Whereas, when the market is down investors become extremely cautious and selective, when it resembles a slot machine that pays out every time, as it does right now, people quit worrying so much about niceties like profits or business models or the like.

In a monthly letter, my friend Zeke Ashton said something that tells me without a doubt that the lack of consideration doesn't stop at the individual investor. Discussing convertible bonds, he says that he could not find a single one out of 600 that warranted further investigation, adding that he cannot understand why investors would "accept such heavy probabilities of capital loss in return for only moderate potential profit."

Some, it seems, never knew what made stocks go up in the first place. So they guess. Generally, they guess badly.

Fortunately, the answer is extremely simple: Companies are valued based on the present value of all of their future cash flows. And note the word "cash flows," not earnings. A company that shows a profit of $0.17 per share on the income statement that has to invest $0.17 for equipment, property, and to offset options dilution isn't worth jack. Wanna know why we harp on "free cash flow?" Because that's where the truth lies.

But in these boom times, when stocks bought today are nearly assuredly going to be higher tomorrow, people have a different set of ideas of what makes investing success. Below are some examples, culled from emails I've received. Some, I would note, are taken somewhat out of context, where the full note was more sophisticated than this particular fragment.

1. Relative valuation. "Compared toXM Satellite Radio (NASDAQ:XMSR), Sirius (NASDAQ:SIRI) is a steal." Well, maybe it is, and maybe it is not. But the amount of free cash flow "relative valuation" generates for any company: zero. There is nothing more dangerous for an investor than confusing relatively undervalued with absolutely undervalued. In the Internet bubble, Ask Jeeves (NASDAQ:ASKJ) was relatively undervalued. That didn't help much.

2. Journalist opinion. "Forbes has obviously been paid by the shorts to bash Ivanhoe Energy (NASDAQ:IVAN)!" The amount of free cash flow a journalist's opinion adds or subtracts: zero. An opinion on a company's value doesn't change that value. This is like getting mad at the weatherman for forecasting rain.

3. Analyst opinion. "Did you see the $50 target put on (NASDAQ:OSTK)?" The amount of free cash flow an analyst's opinion adds to a company: zero. In a New York Times piece this week, the head of MFS, a fund company, said that they wanted their trades a la carte, since they valued analyst research at zero. They might be overpaying. In Overstock's case, the target came out as the company crossed the $32 per share level, about 130% after we identified it for Motley Fool's Hidden Gems. Also irrelevant, since we didn't create cash flow for the company either, but there you go.

4. Stock splits. "I think your [sic] wrong to bash stock splits. Look what Taser (NASDAQ:TASR) did when it split." The amount of added free cash flow from a stock split is zero.

5. Press releases. This one's my favorite -- I've got too many to quote, but they are most prevalent among companies that lack appreciable revenues, like Research Frontiers (NASDAQ:REFR). Press releases could of course contain good news, but in most cases these investors are looking for the fact of the release to be the trigger to add value to the company. Amount of cash flows press releases add to companies: zero. Include here any discussion of other PR events -- analyst meetings or road shows.

6. The stock's gone up. It's like chants of "scoreboard" at a basketball game. "What you think of Elan (NYSE:ELN) now?" come the taunts. I'm actually pretty happy that none of the risks I laid out in my most recent article about the company have come to pass. It didn't -- and doesn't -- mean that they're not real. This one's the hardest to gauge, because a stock price that has gone up means that the company, if it needs, has access to cheaper capital. But short-term stock price movements have no effect on cash flows. Company performance and share price will generally track one another, but sometimes a share price rise only means that any hint of a safety margin is now gone. There's a word to describe a condition where a share price exceeds the company's performance: impermanent.

7. The shorts. "Shorts are destroying GeneMax (OTC BB: GMXX)!" Short sellers are blamed for company stock prices being lower through any number of schemes. Short sellers are also, though, blamed for company struggles. I doubt that the shorts have anything to do with the fact that this former dot-com -- now biotechnology company had zero revenues in its most recent quarter, down from $125. The impact of short sellers on a company's free cash flow: zero.

Any questions?

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Bill Mann owns none of the companies mentioned here. If he did, the impact on their free cash flows would be, well, zero. Please see his profile for a list of his holdings.