What's a Stock Worth?

One of the most important lessons I've learned over 20 years of managing money is that you buy stocks, not companies when investing.

When you buy a company, you control its cash flows and can use them for anything: to acquire other companies, reinvest in the business, or pay a big dividend. Those cash flows are yours when deciding how to spend.

Likewise, when you buy a company’s bond, you’re entering into a legal contract to be paid out in cash. That contract may not hold (if the lender runs into financial problems), but it's a legal contract with real, identifiable cash flow to you.

When you buy a stock, you legally own a stake in the company, though you have virtually zero ownership over its cash flows.

It’s management’s job to decide what’s in shareholders’ best interest…

Companies may take actions to distribute some of their cash flows via dividends or buybacks, but for the most part, their stocks' value is determined by whatever the buyers and sellers agree it’s worth.

As simple as it seems, a stock goes up when there are more buyers than sellers. And when there are more sellers than buyers, a stock goes down.

What’s a stock worth? There’s only one correct answer: Whatever someone is willing to pay.

The concept is probably the most important (and most difficult) for investors to grasp. We're constantly told that a stock is worth the sum of the company’s cash flows, the value of the assets, or any number of measures of “value.”

But that’s the biggest myth in investing. A stock is worth whatever a buyer is willing to pay for it.

During my first decade as an investor, I struggled with this concept. Eventually, I learned to accept it, opening many money-making avenues for me.

HX Research is my opportunity to share these methods with individual investors like you and help you make money in the markets.

How can we tell the balance between buyers and sellers? We don’t have access to the millions of trades out there. But we have access to the result of all those trades: the stock price. This is the basis of technical analysis. It's the best way to see the balance between buyers and sellers.

We also have a way to tell when investors are overly excited (which alerts us to good selling opportunities) and when they're excessively pessimistic (which alerts us to good buying opportunities).

One of our core strategies is to identify these technical moments via the relative strength index (“RSI”).

When a stock trades above an RSI of 70, it tells us it is overheated and due for a pullback. When it trades below an RSI of 30, it tells us a stock may be primed for a rally.

But we don’t suggest going out there and buying every stock after its RSI dips below 30. The key is combining an understanding of technical analysis with a solid fundamental stock analysis.

For instance, if a company is headed toward bankruptcy, it makes sense that its stock would become extremely oversold. Buying into one of these situations is like lighting your money on fire.

Understanding which opportunities are moneymakers is the key to successful investing. It starts with identifying the opportunities and finishes with figuring out which ones to get involved in.