As I’ve continued to read and learn about investing, I think I’ve started to form my own identity. Correctly or not, terms such as “value investor”, “growth investor”, and “deep value investor” are often used. However, something as simple as value investing could be done multiple ways. You could buy companies that are temporarily mispriced and wait for the market to correctly price them. You could buy companies with hidden assets that others are not seeing. You could also buy companies where you think the downside risk is small and the upside is uncertain. You could buy a turnaround. All of these are examples of value investing. Not all of these are types of investing I am interested in, so I am coining my own term, “Earnings Investor”.
What is an “Earnings Investor” exactly? An earnings investor is someone who is trying to buy as much future earnings as possible for as little as possible. An earnings investor believes that the market will eventually pay more for companies as they earn more, assuming they were not overpriced to begin with.
If you are trying to buy as much future earnings as possible, there is still a wide array of risk you can take. For instance, Google and the S&P 500 are priced almost the same today. The S&P 500 represents the US economy and has a very strong chance of growing 4-6% a year of the next ten years. Google is a single company and its results will be much riskier than a bet on the entire US economy. Google’s earnings could go twice as fast as the S&P 500, or could go to zero over the next ten years. But earnings are how the question should be framed. I believe that if Google’s earnings do grow faster than the S&P 500 over the next ten years, then ten years from now Google stock’s value will grow more than the S&P 500 index will.
By constantly viewing your decisions through the frame of earnings, you will make better decisions.