10% Free Cash Yield: The Art Of “So What?”

10% Free Cash Yield: The Art Of “So What?” Sui Chuan, ValueEdge.

A good investor is one who can distill the important from all the noise of information. There are literally hundreds of different metrics a knowledgeable investor has at his disposal in evaluating a company. Because of a difference in mandate (from the buy-side), sell-side research reports tend to have their fair share of unnecessary information as well. Depending on the type of investor you are, certain information will be more or less valuable.

To cut through all the clutter, or to avoid succumbing to herd mentality, I invariably find myself thinking “so what?” every time I encounter a new piece of information. The art of “so what?” – I find to be quite nifty. Frequent readers may notice that I’m usually not one for writing nebulous, philosophical articles. Admittedly, the inspiration came from reading one of the many tribute articles on the late Mr Lee Kuan Yew. This one was from Education Minister Heng Swee Keat at a conference titled ‘The Big Ideas of Lee Kuan Yew” which I have been reproduced below.

“SO?” was Mr Lee Kuan Yew’s favourite question, recalled his former principal private secretary (PPS) Heng Swee Keat.

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He would pose this question when presented with reports on developments. He would often repeat this question to probe any explanation he was given.

These queries would always be followed up by asking: “So, what does this mean for Singapore?”

Recounting this at a day-long conference on the former prime minister’s big ideas, Mr Heng said that this was Mr Lee’s way of “cutting through the clutter” to get to the heart of issues the country faced and tackle them.

In a similar vein, investors can ask themselves – one; what does this mean for the company and two; what does this mean for me as an investor? Ideally, the answers should also be a central part of your eventual investment thesis. Based on this simple litmus test, certain information become inconsequential because of its tenuous relationship with the company and the investor. The incremental benefit of new information becomes marginal past a certain point. Remember, the 80-20 rule.

When a broker excitedly champions a stock with a 10% free cash flow yield, ask yourself “so what?” before you take the plunge. So what does a 10% free cash yield mean to me? It means that for every dollar I put into the business, I get 10 cents of cash which I can use as dividends, or re-investment. So what? Why is this attractive to me? Is it by the mere fact it is in the highest decile of the stock universe? So what? How is it important to my investment objectives? If you are someone gunning to double your portfolio in a year, the consistency of a 10% free cash flow yield will be hardly relevant – you will be looking for large earnings jumps and catalysts. As opposed to someone who is a pure dividend investor, the question of “so what?” will yield different answers.

Drawing a strong link between a piece of information and your investment thesis is a key part of investing. It is the beauty of these two words which forms the canvas in the art of investing.

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I developed my passion for investment management especially equity research at a relatively young age. My investment journey began when I was 20, at a point in time where markets were still recovering from the Global Financial Crisis. My portfolio started from money I saved over the past years and through working during the holidays. I was fortunate to have a good friend with common investing mentality to began my journey towards value investing. To date, we still research and invest in companies together, discussing valuations and potential risks of a company. To date, I manage a fund with a value investing style. Positions are decided upon via a bottom-up approach or smart speculation (a term I came up with when buying a stock for quick profit due to a mismatch in prices in the market due to takeovers/selling of a subsidiary or associate). Apart from managing my own portfolio, I enjoy sharing my research with family and friends, seeking their opinions and views towards the stock. Reading Economics in London, I constantly keep up with the financial news in Singapore & Hong Kong. Despite my busy schedule, it has not stopped me from enjoying other aspects of life. I enjoy a variety of activities in whatever free time I may have – endurance running, marathons, traveling, fine dining, whiskey appreciation, fashion. Lastly, I enjoy meeting new people, discussing ideas and gaining new perspectives towards issues in the world.