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Focus On The Cash

Focus On The Cash by Investment Master Class

“Remember cash is a fact, profit is an opinion” Al Rappaport

Cash flow, not reported earnings, is what determines long-term value” William Thorndike

“Great fundamental investors focus on understanding the magnitude and sustainability of free cash flow”  Michael Mauboussin

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“If you don‘t have the free cash flow, you don‘t have anything.” Leon Cooperman

“When I think of ownership of a business we are basically counting cash as it is earned, which is typically when the product or service is delivered. Investing is simply the counting of all that cash and discounting that cash stream at an acceptable rate to determine what the investment is worth and buying that stream as a discount to what it is worth” Christopher Begg

“We want to basically count the cash. For example many people want to look at free cash flow. They will not deduct capital expenses from it. So this goes back to the Patel, Dhandho mentality which at the end of the day is “what’s in the register?” So what I always ask myself is what’s in the register the end of the year after everything’s done. You’ve paid the taxes and you have the capital expenditures. What’s in the register at the end of the next year and the year after? In general that is a metric that I use - what’s in the register? Because different businesses are different, you might have to get to that register number in different ways. I’m focused on the idea that you have some black box that generates some cash. What is that cash and what is the consistency of that cash over time? Then we can put a multiple on it and take it from there. So that’s generally how I go about it.” Mohnish Pabrai

“We quantify scenarios above and below our base case, but the base-case valuation typically looks two years out at our estimate of free cash flow, then applies a forward multiple we believe is reasonable” Adam Weiss

"Our valuation methods are heavily focused on free cash flow (which we define as cash that can be returned to investors or reinvested in the business)" Zeke Ashton

“There is a class of business where the eventual “cash back” part of the equation tends to be an illusion. There are businesses like that – where you constantly keep pouring it in and in, but where no cash ever comes back…   struggling with a business that never produces any cash – whether its winning or losing as a matter of accounting – is no fun”. You should seek businesses that just drown in money if they just pause for breadth” Charlie Munger

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“I think the job of a security analyst is to take the reported GAAP earnings of a business and translate them into what Buffett calls owner earnings. I call them economic earnings. The next step is to assess and understand the durability of those earnings. Fundamentally, what you’re looking for is how much cash the business can generate on a recurring basis over a very long period of time” Bill Ackman

“The nature of the business and its ability to generate reasonable amounts of free cash flow – even in stressful environments – in relationship to price paid is the most important factor” Bruce Berkowitz

"The future value of all the future cash flows of the company is ultimately the only thing we care about"  Andrew Brenton

"I want to see if a company is generating cash or simply accounting earnings"  Ralph Wanger

“We’re essentially trying to pay a low-teens multiple of what Warren Buffett defined in his 1986 Berkshire Hathaway shareholder letter as owner earnings –free cash flow before growth related capital spending – for businesses we believe can compound our capital at a mid-teens rate or better” Ira Rotherberg

“Not every idea fits this, but we basically estimate free cash flow – EBITDA less maintenance capital spending, cash taxes and cash interest, over whatever time horizon we can reasonably assess, putting a reasonable multiple on that in the out year. We’re shooting for situations with double-digit free-cash-flow yields. We think with those we have a very significant margin of safety” Jason Stankowski

"Investments throw off cash flow for the benefit of owners, speculations do not. The return to the owners of speculations depends exclusively on the vagaries of the resale market” Seth Klarman

“The most important metric we look at is probably Enterprise Value to free cash flow” Eric Rosenfeld

"I focus on the free cash flow, and assess its durability and likely future growth" Allan Mecham

“We value companies based on normalised free cash flow, where we strip out the quirks of GAAP to arrive at the excess cash a business generates – or could generate – after reinvesting enough to maintain current capacity and competitive advantages but before investing for growth” Danton Goei

“Good companies will generate free cash that is around the same level as net income, give or take. When that isn’t the case, it’s a flashing red signal to us to look more closely at the quality of the earnings” Kevin Holt

"We like free cash flow [the amount of money available to a company after operating costs and capital expenditures].  At the end of the day, you want to see that cash has been generated that can be spent on dividends, buybacks, mergers, or reinvestment in the business." Larry Pitkowski

"Common yardsticks such as dividend yield, the ratio of price to earnings or to book value, and even growth rates have nothing to do with valuation except to the extent they provide clues to the amount and timing of cash flows into and from the business" Warren Buffett

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“We want to know how much cash is coming back to investors, how predictable that cash flow is going to be and how would I value that relative to the risk-free rate of return. So we’re trying to look at a business as you would look at a bond or as a private equity investor might look at a private entity.” Chris Mittleman

"We approach valuation from a perspective similar to that of a 100% owner – what are the excess cash flows we will receive in the future and how certain are we about their durability?" Wally Weitz

"My father and grandfather were in the construction business, so after my exposure to that I've never been comfortable looking at anything other than cash flow to try to fundamentally understand a business.  Over time I've refined that down to discretionary cash flow, what's left over after what we consider maintenance capital spending and dividends" Micheal Cook

"We want to build a portfolio of undervalued businesses that are good companies that generate cash flow"  Dave Samra

"A primary determinant of which stocks become a core holding in the portfolio and receive a higher capital allocation are the predictability and reliability of the company's cash flows" Alex Roepers

"We use many different valuation methodologies, but the most common at Maverick is to compare sustainable free cash flow to enterprise value." Lee Ainslee

"I tend to focus on free cash flow. We basically looked at the amount of cash that the business could return to us as shareholders and valued that." Glenn Greenberg

“How do I determine the discount? I usually focus on free cash flow and enterprise value (market capitalization less cash plus debt). I will screen through large numbers of companies by looking at the enterprise value/EBITDA ratio, though the ratio I am willing to accept tends to vary with the industry and its position in the economic cycle." Michael Burry

"Ultimately, in one form or another, cash flow is all companies have to distribute to investors, and cash flow is the only thing investors can spend.  Ultimately, investment success depends on how much an investor pays for the cash flow a company generates." Andy Redleaf

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