- Viewing life as a series of discounted cash flows provides a framework for making decisions
- Option theory and statistics can clarify payoffs when cash flows, returns and discount rates are probabilistic
- Outcomes should drive investment decisions
At its very basic level, investing is about making trade-offs. You give capital today with the expectation of getting it back at some point in the future (hopefully with some return). That is why cash flows, their timing and the uncertainty/risk associated with them form the basis of any financial decision.
There is a trade-off when you sell one stream of future cash flows for another, and a framework that helps you allocate across these competing demands provides a foundation to build an investment methodology upon.
Disclaimer: All views expressed in this article are that of the author and do not necessarily reflect the views of his employer or any of its affiliates. The author may be associated as an investor or as an advisor with certain companies mentioned in this article.