There are so many factors that go into an investment or a trade. Most simple minded folk out there think trading is risky because it’s shorter term. That’s just complete nonsense. If someone ever says that to you they deserve a nice big slap to their face. Bring them back to their childhood. Also, they just let you know they know as much as the dog that’s pissing on that building over there. The truth is that a trade and an investment are two different creatures and regardless of the time horizon each has numerous factors that make them work.
I am going to break down in a series of posts what I think are the most important factors that go into an investment, a trade, and the grey area that develops between the two. Investment is where I am starting first and the factor I dive right into first is free cash flow also known as that FCF. Its simply operating cash minus capital expenditures.
Wall Street goes absolutely crazy and myopic on earnings. They harp relentlessly on earnings per share (EPS) which is extremely imprudent due to the fact earnings are so easily propped up by accounting methods which are almost magical sometimes. It could be cost cutting or share buybacks you name it they look for all the tricks in the bag to pull the wool over your eyes to get that earnings beat. It’s not a pure sense of the current business and ignores the “real” cash that a firm brings home. It is rather troublesome and perplexing to fake free cash flow. Free cash flow sustains future earnings growth. When quality free cash flow is absent earnings are impossible to keep up which then can force a company’s debt levels to blow out. Free cash flow is the path to prosperity for a company.
When a stock price is low and free cash flow is moving on up, bet your dam ass that the stock and the earnings are going to rip. It’s like a law of the universe. The best long term investors out there who bring back the huge returns are private equity firms. They are all about that free cash flow life.
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