The Time Machine

Imagine stepping into a time machine, setting the thing in reverse and going back to 1999. On your way to rent The Big Lebowski at Blockbuster, you'd bet tempted to use your knowledge of the future and pop into your broker at Smith Barney and say "I’d like some shares of Apple. Here are some dollars."

Your bet would see shares increase 30% per year through today, plus you'd start getting dividends in 2012. The company's adventures would expand yearly cash flow from $751 million to $111 billion, or 150 times!

These happy results would come despite enduring the worst decade ever for stocks (1999-2009) and Apple doing nothing as a stock for the first five years. At the end, though, you and Charlie XCX could take your winnings, cruse in her old Mercedes and celebrate, listening to "Hit Me Baby One More Time" on the CD player.

Or, you could have gone back and borrowed and sold shares of Yellow, the trucking company. Once everywhere on America’s highways, its been mismanaged into a shadow of what it was, despite the many opportunities to move goods from one place to another that have cropped up over the past two decades. Shares fell from 99% during that time.

If you had a time machine, you could fish for even better opportunities. There were better ones to be had... If you could use a time machine, you'd probably have a pretty neat hustle by this point and not be reading this…

Each time you buy or sell a share of a company is like a bit of time travel. Investing professor Michael Mauboussin also frames the job of an investor as a time traveler. When you buy shares, you step in, press "forward," look back at the past and say "whoa, this company crushed it, investor expectations were way too low." Or you say "damn, AOL didn't quite take over the world, expectations were way too high."

Our time machine is not quite as effective as Mr. Wells'. OK, ours is a bit crap. It only exists on paper - a collection of mental models, financial models and metaphors that enable us to think about how an investment might work out in the future and slightly (slightly) tip the odds of success in our favor. But, with that toolbox, we can step forward, evaluate a range of outcomes and compare them to investors' expectations for the business today.

Calling it "imperfect" is really an understatement, but imperfect tools are the ones we have and, over time, they'll deliver.