Free Cash Flow as True North

“an investment is a net present value–positive activity (the likelihood of the net present value of the potential benefits minus the likelihood net present value of the potential losses is positive).”

“Private Market Value (PMV) is the value an informed industrialist would pay to purchase assets with similar characteristics. We measure PMV by scrutinizing on- and off-balance-sheet assets and liabilities and free cash flow. As a reference check, we examine valuations and transactions in the public domain. Our investment objective is to achieve an annual return of 10% above inflation for our clients.7”

“Robertson still focuses on the global equity markets because he feels they offer an opportunity to "go places where prices are very reasonable." He is currently buying companies with very high free cash flow—once a value investor always a value in- vestor. The companies that are attractive to him are those that do not have regular growth but do have free cash flow. He is particularly interested in companies that have 16 to 20 percent average free cash flow. This indicates a company's ability to build outward.”

“Graham and Dodd wrote, "An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return." And while there are number of things one needs to look at when evaluating or researching a potential in- vestment, Graham outlines the following six items as essential factors to look at when analyzing a business: 1. Profitability 2. Stability 3. Growth in earnings”

“the outsiders (who often had complicated balance sheets, active acquisition programs, and high debt levels) believed the key to long-term value creation was to optimize free cash flow, and this emphasis on cash informed all aspects of how they ran their companies—from the way they paid for acquisitions and managed their balance sheets to their accounting policies and compensation systems.”

“this led the outsider CEOs to focus on cash flow and to forgo the blind pursuit of the Wall Street holy grail of reported earnings. Most public company CEOs focus on maximizing quarterly reported net income, which is understandable since that is Wall Street’s preferred metric. Net income, however, is a bit of a blunt instrument and can be significantly distorted by differences in debt levels, taxes, capital expenditures, and past acquisition history.”