So why growth stocks are more sensitive to inflationary pressures than value stocks? Well, let me show you to evaluate a company. We usually use the system called the dcf discounted cash flow. Basically, there's two elements here: if you notice the discount and the cash flow, essentially what we're doing we're discounting future cash flows to present value today, if that sounds like chinese to you, hang on a second i'm going to explain to you in a second what it Means essentially, every business is worth whatever amount of money it can generate. Now i hate to agree with kevin o'leary here, but that's essentially at the core of it.

What it means now, with growth, you have to be a little bit more patient, but with value you're. Seeing the cash right now, but on the other hand, on the flip side, with growth, you have way more potential in the future than a value stock. Typically right, so here's the thing. If i look at year, one year two year, three year, four and year, five summers and four didn't register.

Now i'm going to generate money here here here here and in year five, let's just assume it's a crazy growth pattern. On the other hand, let's compare it to a classic value stock. I'm going to generate x here - 1.1 x, here - 1.2 - maybe x here - maybe 1.3 x here and so forth. So you can see that the level of growth is completely different.

Now, on the one hand, this company at the bottom, this is almost guaranteed money like company like coca-cola or dairy queen or any of these sort of companies. Warren buffett invests and these are pretty much guaranteed, but they're not going to get you out of the stratosphere. This isn't tesla money right. This isn't going to explode.

On the other hand, here you have much more risk, but the reward, the payoff, the potential the gamble is much bigger. So the only question is: what's your philosophy here, but here's the thing whenever you choose to invest in this sort of stock, the growth, here's what happens now. Let me tell you a little story. Let's assume that i owe you money.

I ran over you with my tractor and i was drunk and then the court ruled that i have to pay you over the next 10 years, whatever amount of money just to as restitutions right. So let's say i owe you a hundred thousand dollars each year for ten years, so totally one million dollars to repay for running over. So let me show you how it looks like so. Basically we have year one sorry about that.

It doesn't register for some reason. Let's try it again year, one year, ten: okay, so there's a hundred k every year for 10 years, total of one cool million. Now what if i have money - and i don't need to pay 100 every year? What, if i come to say, hey, listen! I got an offer for you that you can't refuse only. I don't do that in a kind of you know, god for the way and here's my offer, i'm going to give you a lump sum.

Instead of paying you 100 000 for 10 years, i'm gon na give you a whole lot of money today kind of like the jj wentworth. I want my money now staying. You know remember that ad and television, i'm gon na, give you actual lump sum today. My question is how much how much are willing to take to get this thing to go away instead of a million? What would be the amount that you're going to be willing to take today to settle this, because i can still pay you 100 every year for 10 years and pay you a million, but if you're willing to take a little bit less i'm going to reward you.

I'm going to give you a lump sum right now and i'm going to really make it nice for you. So the question is how much you're willing to take now. Here's the thing. Let's say that this is me: let's say that this is you okay, okay, so you're thinking to yourself.

Well, i can take - probably i don't know eight hundred thousand dollars - and i could put it in the bank and get interest and over the 10 years that i'm going to put in the bank and get interest payments for i'm probably going to make a million. And i'm using 800 just in this example, it can be any sort of moment, but that would depend on one thing: i guess you understood it by now. This would depend on what's the interest rate, the more the or the higher the interest rate is the less money i'm willing to take, because i'm going to be able to make it back through putting in the bank and getting interest. So it would really depend, my answer would really depend or would be different.

Let's say if the interest rate was 10 percent or if the interest rate was 0 right. If the interest rate is 0 like it is today, then i'm going to tell you: listen buddy nice offer, but i ain't taking anything below a million, because i really can't do nothing with 700 or 800 000, not even with 900 000.. There's, nothing! There's zero interest right in the market. It's not going to help me! So just pay me the million, because rate is zero, but if the rate is 10 right, so you're gon na say well.

If you'll give me 900 and i'll make another 90., this pretty much puts me in a million, but i'm getting it lump sum today and it also eliminates a lot of risk of waiting for 10 years. I can enjoy the money today, so i'll, probably take 900 here and i'll take 1 million here, and why does it have to do with our question about inflation and ghost stocks? Well, let me explain this little exercises. We just did with the two human beings right here is the same thing that every company does with its valuation when we value companies for the future. This is exactly what we're looking at we're looking at the future and how much cash flow is going to be generated.

Imagine that every single piece of cash flow that we're generating in the future is actually these little little payments like, for example, i'll show you like here this little percent right here, whatever the bank is going to pay me, is exactly what we're looking at, what the Fed is going to do with interest rates exactly. This is the same idea so, instead of using these fictional characters - and this fictional example of a drunken tractor driver - i don't know if you could say, attract the driver operator. Let's just use an actual example. Let's keep this little sad me in the corner, because i think he looks nice yep.

Let's keep you on uh i took we took away one leg. He lost his leg in the tractor accident. I guess so. Company year, one year two year, three year four year, five, remember that, and you remember how we showed you x, 2x, 3x, 4x and then a 5x.

Now, basically, this is 20 22.. So this one is basically this amount. Whatever we make in 2022, it's worth to us whatever it is, but this 2x we have to bring it back one year, two years, four x, three years and five egg four years, so every one of these amounts have to be brought back to today. In the same example, i just showed you with the two human beings trying to figure out how much money they're willing to take today to alleviate the future payments, but these little 2x3x4x 5x numbers that are going back to 2022 from 2023, four five and six and Onwards, the amount they're going to be discounted by how much it's going to cost to bring them back depends on the interest rate and the higher the interest rate.

Is the more chunk you're going to be willing to take away to buy this company today at a lower price? It's the same thing with like the two human beings. So if the interest rate is high, this 2x right here becomes 1.5 x. Today, this 3x becomes 2x. You see what i'm doing here so, basically, all of the future cash flows are becoming less valuable today and by the way.

This is exactly why this thing is called the discounted cash flow, so the cash flows are discounted and the rate of discount is the interest rate in the market. Essentially, it's actually called the a weighted average cost of capital whack, but it's comprised from, i guess expected returns and whatnot and but also the cost of debt, and the cost of that is a really integral part of that calculation. So when you have interest rates, zero really drives valuations up, because all of these amounts state 2 x, 3 x, 4 x. They all stay 2x3 at 4x, because the interstate is 0..

But when there's an inflationary period and the fed is hawkish and basically talking about raising interest rates, the weighted average cost of capital goes up and the rate of discount in the discount cash flow, the dcf goes up, bringing down the valuation. So the more you have 2x 3x4 x, 5x, the more you're impacted, but here's the secret every single company in the world is going to get hit by a reduction in this valuation through dcf. If interest rates goes up, but the companies with the most amount of value in year, two three, four five and six - are going to be affected, much more heavily than a company with 1.1, 1.2, 1.3 and so forth and so forth. And that is exactly in five minutes why these other companies will be hit the most when interest rates goes up to handle inflation, and it's not really rocket science simple, as that, don't let them you around!.

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