Forecasting Future Business Results are The Key to Successful Stock Investing: Part 1


As investors, we can learn a great deal from the past about the businesses we are contemplating investing in. However, as investors, we must also recognize that we can only truly invest in the future.

Consequently, although understanding a company’s history can help us better understand the business, our success is predicated on our ability to recognize the business’s future potential. And most importantly, we can also learn from past valuation levels, but we must calculate the present and future value of the business based on its capacity to produce a future income stream on our behalf. At its core, fair valuation is a function of discounting future earnings, cash flows and revenues back to the present value.

Therefore, if you are looking for good dividend paying stocks to add to your retirement portfolio, you might want to start out by reviewing analysts’ estimates to aid in your selection and evaluation process.

Putting Analysts’ Estimates Into Perspective

The future value (total return) of your investment will be a function of fair value and the growth the business you are selecting achieves in the future. Therefore, the key to investment success is predicated on forecasting the future growth of any business you are evaluating with as much accuracy as is possible. This is most commonly measured based on a company’s reported earnings when they file each quarterly financial statement.

However, early in this article I do want to point out that earnings, although commonly used, are only one of many other metrics where the same logic can be applied. In other words, this same need-to-accurately-forecast principle applies to cash flows, revenues, dividends and other metrics such as EBITDA, etc.