How to understand stock prices. Read on for a layman’s guide.

Stock price = today’s number + tomorrow’s story.

You have to get both right. But tomorrow’s story is more important, it has disproportionate weightage in the valuation.

Why?

Today's number i.e. quarterly earnings is a periodic health check.

Consistently doing simple things well

1.     Earning more than you are spending
2.     Predictable, doing what you said you will do
3.     Avoiding self-inflicted mistakes

Today's numbers reflect the firm's liquidation value i.e. proceeds from asset sales less debt obligations, technically it is called book value or share holder’s equity.

Tomorrow’s story

Storytelling is human beings' superpower. According to Yuval Hariri, the emergence of storytelling 70,000 years ago allowed sapiens to break out and become the most dominant species.

The story has to appeal to primal human instincts

Underdog fighting for a long-term righteous cause despite challenges and temptations. Ultimately, winning the battle against all odds, unleashing transformation to deliver goodness to the world.

Humans will pay a premium for a convincing entertaining story above book value.

Great rewards are on offer for master storytellers who do simple things well.

It is as simple as that.

Note: Views are personal

You can read all my “Notes to Self” at view all blogs.